NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment
Mr. Sameer Khanna can earn a nominal return of 12% a year on a deposit while inflation is 5%. Using the exact (Fisher) relationship, his real return is closest to:
The exact real return is about 6.67%. Dividing the nominal growth factor of 1.12 by the inflation factor of 1.05 gives 1.0667. The simple subtraction answer of 7% is only an approximation and overstates the exact figure.
- A7.00%
- B17.60%
- C6.67%Correct
- D5.00%
Explanation
Real return = (1.12 / 1.05) - 1 = 1.06667 - 1 = 6.67%. Simple subtraction gives 7%, which is only an approximation and not exact. 17.6% multiplies instead of dividing, and 5% merely repeats the inflation rate.
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