Question

At the beginning of the year, you bought 100 shares of Microsoft common stock for $105, and over the course of the year, the company paid a dividend of $6 per share. At the end of the year, you sell your 100 shares for $95. The inflation rate for the year was 5%.
The nominal return on your investment was ___ %.

The real return on your investment was ___%.

Answer 1

Answer:

Nominal return  =  3.80 %

Real return = -1.2 %

Explanation:

given data

bought = 100 shares

common stock - $105

dividend = $6 per share

sell 100 shares =  $95

inflation rate = 5%

solution

we know Purchase cost  will be here

Purchase cost = 100 ×  $105

Purchase cost = $10,500

so Total dividend received is

Total dividend received = 100 × $6

Total dividend received = $600

and

Total sales receipt is = 100 × $95

Total sales receipt = $9500

so

Total earnings from shares = $9500 + $600

Total earnings from shares = $10,100

Loss from shares  is = Total earning from shares - Purchase cost

Loss from share = $10,500 - $10,100

Loss from share = $400

so

nominal return on investment is

Nominal return  = $\frac{Loss}{Purchase cost}$ × 100

Nominal return  = $\frac{400}{10500}$ × 100

Nominal return  =  3.80 %

and

real return on your investment

Real return = Nominal return - Inflation rate

Real return = 3.80 - 5.00

Real return = -1.2 %