connect FINANCE Assignment 4 Summer 2018 Question 17 of 17 v

connect FINANCE Assignment #4 (Summer 2018) Question 17 (of 17) value: 1.00 points Say you own an asset that had a total return last year of 14 percent. If the inflation rate last year was 3.5 percent, what was your real return? 10.34% 10.14% 0.921% ? 10.24% 10.04% References eBook & Resources Multiple Choice ng Objective 07-04 The ipact of MacBook

Solution

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation.

The nominal rate is the stated rate or normal return that is not adjusted for inflation.

The rate of inflation is calculated based on the changes in price indices which are the price on a group of goods. One of the most commonly used price indices is the consumer price index(CPI). Although the consumer price index is widely used, a company or investor may want to consider using another price index or even their own group of goods that relates more to their business when calculating the real rate of return.

                                       REAL RATE OF RETURN=1+ NOMINAL RATE/ 1+ INFLATION RATE    - 1

                                                                                 = 1+0.14 / 1+0.035 - 1   * 100

                                                                                 = 10.145% (APPROX)