NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor's portfolio earned a nominal return of 10% in a year when inflation was 6%. Using the exact (Fisher) relationship, the real return is closest to:
The real return is about 3.77%. It is found by dividing the growth factor of 1.10 by the inflation factor of 1.06 and subtracting one. The simple subtraction of 6 from 10 gives 4%, which is only an approximation and overstates the real gain.
- A4.00%
- B3.77%Correct
- C4.24%
- D16.60%
Explanation
Real return = (1.10 / 1.06) - 1 = 0.0377, i.e. 3.77%. Simply subtracting gives 4.00%, which ignores compounding of inflation. 4.24% wrongly divides by 1.10 reversed logic, and 16.60% multiplies instead.
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