NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor's portfolio returned 12% in a year when inflation was 5%. Using the exact (Fisher) relationship, what is the real return, to the nearest 0.01%?
The real return is 6.67%. Dividing the growth factor 1.12 by the inflation factor 1.05 gives 1.0667, so purchasing power grew 6.67%. Simply subtracting 5% from 12% gives 7%, which is only an approximation.
- A6.67%Correct
- B7.00%
- C6.50%
- D17.60%
Explanation
Real return = (1.12/1.05) − 1 = 1.066667 − 1 = 6.67%. Simple subtraction gives 7%, which ignores the compounding of inflation on the return. 17.60% wrongly multiplies the two rates.
Did you get it right without looking?
One question tells you little. A timed set on Investment Landscape shows your real accuracy, how long you take and where you lose marks.
More Investment Landscape questions
- Which of the following best describes 'inflation risk' faced by an investor holding a fixed deposit that pays a fixed rate of interest?
- Mr. Iyer bought a bond for Rs 1,000 and received Rs 80 as interest during the year. At year end, he sold the bond for Rs 1,020. What is his …
- An investor's portfolio earned a nominal return of 10% in a year when inflation was 6%. Using the exact (Fisher) relationship, the real retu…
- Which of the following best describes 'liquidity risk' for an investor holding a financial asset?
- Ramesh invested Rs 50,000 in a bank deposit that paid 8% simple interest per annum for 3 years. What is the total amount he receives at matu…
- Which of the following asset classes is generally considered to have the highest liquidity for an Indian retail investor?