Question

Last year, you purchased a stock at a price of $60.00 a share. Over the course of the year, you received $2.90 per share in dividends and inflation averaged 3.4 percent. Today, you sold your shares for $65.60 a share. What is your approximate real rate of return on this investment

Answer 1

Answer:

Real rate of return= 13.7%

Explanation:

The return on investment 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:

The total return = (2.90) + (65.60-60)= 8.5

To determine the real return, we adjust the nominal return for the impact of inflation as follows:

Real total return ($) =  8.5/1.034=8.220

Total return in (%) = (8.220 /60)× 100= 13.7%

Answer 2

Answer:

1.1%

Explanation:

To calculate the approximate real rate of return on the investment, we first need to calculate the nominal rate of return. As shown below:

Nominal Return = (Price of Share Sold - Price of the Share + Dividend received on share) / Price of the Share x 100

Nominal return = ($65.60 - $60.00 + $2.90) / $60.00

= 0.045 x 100

= 4.5%

Then we deduct the inflation rate from the nominal return to get the approximate real rate. This calculate below:

Approximate real rate = Nominal Return - Inflation rate

Approximate real rate = 4.5% - 3.4%

= 1.1%

Hence, the approximate real rate  on this investment is 1.1%.