NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor earns a nominal return of 10.2% in a year when inflation is 2%. Using the exact (Fisher) relationship, what is the real rate of return?
The real rate of return is 8 percent. Using the exact relationship, divide 1.102 by 1.02 to get 1.08, then subtract one. Simply subtracting inflation from the nominal return gives 8.2 percent, which is only an approximation.
- A8.2%
- B8.0%Correct
- C8.4%
- D12.4%
Explanation
Real return = (1.102/1.02) - 1 = 1.08 - 1 = 8%. The simple subtraction 10.2 - 2 = 8.2% is only an approximation and not exact. Adding gives 12.2%-type errors.
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