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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment

Mrs. Kavita Nair has an investment earning a nominal return of 10.5% per annum while inflation is 5%. Using the exact (Fisher) relationship, what is her real rate of return, approximately?

The exact real return is about 5.24%. Dividing the nominal growth factor 1.105 by the inflation factor 1.05 gives 1.0524, so purchasing power rises 5.24%. The simple subtraction gives 5.5%, which is only an approximation and not the exact answer.

  1. A5.5%
  2. B5.24%Correct
  3. C4.76%
  4. D15.5%

Explanation

Real return = (1 + nominal)/(1 + inflation) - 1 = 1.105/1.05 - 1 = 0.05238, about 5.24%. The 5.5% figure is the simple subtraction approximation, which is not exact. 4.76% wrongly divides the gap by the nominal growth factor (0.055/1.155), and 15.5% adds the two rates.

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