Question

Leo purchased a stock for $47.10 a share, received a $1.74 dividend per share and sold the shares for $50.10 a share. During the time he owned the stock, inflation averaged 3.1 percent. What is his approximate real rate of return on this investment?A. 6.30%B. 6.96%C. 7.18%D. 9.69%E. 10.06%

Answer 1

Answer:

6.96%

Explanation:

Find nominal expected return;

Nominal expected return =  [(Dividend + New Price -Old Price) /Old price]*100

= [ (1.74 +50.10 - 47.10) / 47.10 ]*100

= (4.74 / 47.10)* 100

= 0.100637 *100

=10.0637%

Real rate of return = Nominal return - inflation rate

Inflation rate = 3.1%

Real rate of return = 10.0637% - 3.1%

= 6.96%