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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Retirement Planning Basics

Mr. Sanjay Mehta retires with a corpus invested to give a real (inflation-adjusted) return. His expected post-retirement return is 9% a year and inflation is 5% a year. Using the exact formula, the real rate of return is closest to:

The real rate of return is about 3.81%. It is computed exactly as (1.09 divided by 1.05) minus 1. Simply subtracting inflation from the nominal return gives 4%, which is only an approximation and not the exact figure.

  1. A4.00%
  2. B3.81%Correct
  3. C14.45%
  4. D4.20%

Explanation

Real rate = (1.09/1.05) - 1 = 1.03810 - 1 = 3.81%. Simple subtraction gives 4.00%, which is only an approximation. Adding the rates gives 14%, or 14.45% with compounding, which is wrong. 4.20% has no basis.

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