Question

Assume you earned 12.3 percent on your investments for a time period when the risk-free rate is 4.25 percent and the inflation rate was 1.2 percent. What was your real rate of return for the period

Answer 1

Answer:

10.97%

Explanation:

the formula to calculate real rate of return:

real rate of return = [(1 + nominal return) / (1 + inflation rate)] - 1

real rate of return = [(1 + 12.3%) / (1 + 1.2%)] - 1 = (1.123 / 1.012) - 1 = 0.1097 or 10.97%

the risk free rate is not included in the calculation of the real rate of return, but we can also calculate the real risk free rate of return using a similar formula:

real risk free rate of return = [(1 + risk free rate) / (1 + inflation rate)] - 1 = 3.01%