Question

6) Which one of the following statements is correct? A) Historical real rates of return must be positive. B) The risk-free rate represents the change in purchasing power. C) The real rate must be less than the nominal rate given a positive rate of inflation. D) Nominal rates exceed real rates by the amount of the risk-free rate. E) Any return greater than the inflation rate represents the risk premium.

Answer 1

Answer:

The correct answer is C.

Explanation:

In economics, real rate refers to a rate of return that accounts for the effects of inflation, in order to reflect how rates of return have really changed over time. When the rate of inflation is positive (above 0%), the real rate will be less than the nominal rate. For example, if an investment offers a rate of return of 10% per year, but the rate of inflation is 4% during that year, that means the real rate is 6% per year (10% - 4% = 6%).