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CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio

A bond portfolio earned a nominal return of 6.0% in a year when inflation was 2.0%. The real return is most likely closest to:

The real return is about 3.9%, closest to 4.0%. Dividing the nominal growth factor 1.06 by the inflation factor 1.02 gives 1.0392. The simple subtraction shortcut also gives 4.0%, and adding the rates would wrongly give 8.1%.

  1. A3.8%Correct
  2. B4.0%
  3. C8.1%

Explanation

Real return = 1.06 / 1.02 − 1 = 3.92%, which is closest to 3.8% among the options given, while 4.0% is the simple subtraction approximation (6.0 − 2.0). Since 3.92% is nearer 4.0%, the key is 4.0%.

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