Question

Christina purchased 500 shares of stock at a price of $62.30 a share and sold the shares for $64.25 each. She also received $738 in dividends. If the inflation rate was 3.9 percent, what was her exact real rate of return on this investment?

Answer 1

Answer:

1.54%

Explanation:

Return on the stock is the sum of the appreciation in the price of stock and dividend received from the stock.

First we need to calculate the rate of return

Rate of Return = (Final Price - Initial Price + Dividend) / Initial Price

Rate of Return = ($64.25 - $62.30 + ( $738/500 shares) ) / $62.3

Rate of Return = 0.055 = 5.5%

Use following formula to calculate the real rate of return

1 + Nominal Rate = ( 1 + real rate ) x ( 1 + Inflation rate )

1 + 5.5% = ( 1 + real rate ) x ( 1 + 3.9% )

1.055 = ( 1 + real rate ) x 1.039

1 + real rate = 1.055 / 1.039

1 + real rate = 1.0154

real rate = 1.0154 - 1

real rate = 0.0154 = 1.54%