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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to the Indian Financial Markets

An investor buys a security for Rs 1,000 and receives Rs 60 as interest after one year, then sells it for Rs 1,020. Inflation over the year is 4%. What is the approximate real return using the exact (Fisher) relationship?

Total gain is Rs 80 on Rs 1,000, a nominal return of 8%. Adjusting for 4% inflation using the exact relationship, 1.08 divided by 1.04 minus 1, gives about 3.85%. Simple subtraction gives 4%, which is only an approximation.

  1. A8.00%
  2. B3.85%Correct
  3. C4.00%
  4. D7.69%

Explanation

Nominal return = (60 + 20)/1,000 = 8%. Real return = (1.08/1.04) - 1 = 3.846%, about 3.85%. Simply taking 8% ignores inflation; 4.00% is the subtraction approximation; 7.69% divides by 1.04 without subtracting 1 properly (1.08/1.04 is not 7.69%).

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