NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor's nominal return on a deposit is 8% per annum and inflation is 5% per annum. Using the exact (Fisher) relationship, the real rate of return is approximately:
The real rate of return is about 2.86%. It is found by dividing one plus the nominal rate by one plus the inflation rate, 1.08 divided by 1.05, and subtracting one. Simply subtracting 5% from 8% gives 3%, which ignores compounding and is only an approximation.
- A3.00%
- B2.86%Correct
- C13.00%
- D3.20%
Explanation
Real return = (1.08/1.05) - 1 = 1.028571 - 1 = about 2.86%. The simple subtraction of 3% ignores compounding, so it is not the exact figure. Option C adds the rates instead of comparing them.
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