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CFA Level I · CFA Level I Exam · Types of Financial Returns

Compared with the nominal return, the real return of an investment is most likely to be:

The real return is lower than the nominal return when inflation is positive. The real return adjusts the nominal growth factor for the rise in prices, so purchasing power grows by less than the money return. It would exceed nominal only if inflation were negative.

  1. Alower when inflation is positiveCorrect
  2. Bhigher when inflation is positive
  3. Cequal to the nominal return when inflation is positive

Explanation

Real return = (1 + nominal)/(1 + inflation) − 1, so positive inflation reduces purchasing power gains and the real return is below the nominal return. It would be higher only under deflation and equal only at zero inflation.

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