CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An investor earned a nominal return of 8.0% over a year in which consumer prices rose 3.0%. The real return, using the exact (compounded) relationship, is closest to:
The real return is about 4.85%. Divide the nominal growth factor of 1.08 by the inflation factor of 1.03 and subtract one. Simply subtracting 3% from 8% gives 5%, which ignores compounding and slightly overstates the real return.
- A4.85%Correct
- B5.00%
- C11.24%
Explanation
Real return = (1.08/1.03) - 1 = 1.04854 - 1 = 4.85%. The 5.00% option simply subtracts inflation from the nominal return, which ignores compounding. The 11.24% option multiplies the factors rather than dividing.
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