NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
Mr. Rao earns a nominal return of 12% on an investment while inflation is 6%. Using the exact (Fisher) relationship, his approximate real return is closest to:
The real return is about 5.66%. Dividing the growth factor of 1.12 by the inflation factor of 1.06 gives 1.0566, so purchasing power rises by roughly 5.66%. Simply subtracting 6% from 12% overstates it slightly because it ignores the effect on the return itself.
- A6.00%
- B18.00%
- C5.66%Correct
- D6.38%
Explanation
Real return = (1.12 / 1.06) - 1 = 1.05660 - 1, about 5.66%. Simple subtraction gives 6%, which ignores that inflation also reduces the value of the return. Adding gives 18%, wrong sign.
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