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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments

Which of the following best describes the effect of inflation on an investor's real return when the nominal return is fixed?

Higher inflation reduces the real return when the nominal return is fixed. Real return is roughly the nominal return minus the inflation rate, so rising prices erode the purchasing power of the gains. This applies to debt and equity alike.

  1. AHigher inflation reduces the real returnCorrect
  2. BHigher inflation increases the real return
  3. CInflation has no effect on the real return
  4. DInflation affects only equity returns, not debt returns

Explanation

Real return is approximately nominal return minus inflation. With the nominal return fixed, a higher inflation rate reduces the purchasing power gained, so the real return falls. It applies to all asset classes, including debt.

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