Asked by Elisa Otero on Jul 07, 2024
Verified
If investors require a 7% nominal return and the expected inflation rate is 3%, what is the expected real return?
A) 1.04%
B) 3.00%
C) 3.88%
D) 4.00%
E) 10.21%
Nominal Return
The amount of profit or loss realized from an investment without adjusting for factors like inflation.
Expected Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling, as anticipated by consumers, investors, and economists.
Real Return
The rate of return on an investment after adjusting for inflation.
- Differentiate between real and nominal rates of return and understand how inflation affects these rates.
Verified Answer
JG
joetta GiddingsJul 07, 2024
Final Answer :
C
Explanation :
The expected real return can be calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Solving for the real rate gives: (1 + 0.07) / (1 + 0.03) - 1 = 0.0388 or 3.88%.
Learning Objectives
- Differentiate between real and nominal rates of return and understand how inflation affects these rates.