Question

You purchased shares of stock one year ago at a price of $62.37 per share. During the year, you received dividend payments of $1.77 and sold the stock for $69.49 per share. If the inflation rate during the year was 2.07 percent, what was your real return?

Answer 1

Answer:

real rate of return= 10.93%

Explanation:

The return on equity is the sum of the dividends earned and capital gains made during the holding period of the investment.

Dividend is the proportion of the profit made by a company which is paid to shareholders.  

Capital gains is another type of the return made on an equity investment as a result of increase in the value of the shares. It is difference between the cost of the share and the value at the time of disposal.

Therefore, we can can compute the return on the investment as follows:

Capital gain =  $69.49- 62.37 = 6.92

Dividend -= 1.77

Nominal return on stock= (1.77 + 6.92)/ 62.37 × 100 =  13.93 %

Inflation is the increase in the price level.It erodes the value of money.rise in the price of money  

Nominal interest is that quoted for investment or loan transactions. It has not been been adjusted for inflation.  

Real interest rate is the amount of interest in terms of the the quantity of good and services that can be purchased. It is the nominal interest rate adjusted for inflation.  

The relationship between inflation, real return and nominal return rate is given using the Fishers Effect;  

N = ( (1+R) × (1+F)) - 1  

N- nominal rate, R-real rate, F- inflation  

real rate of return = (1.1393)/ (1.027)- 1 = 0.1093

real rate of return = 0.1093 × 100 = 10.93%

real rate of return= 10.93%