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

Which of the following best describes the real rate of return, in the approximate sense used for investment analysis?

The real rate of return is approximately the nominal return minus the inflation rate. It measures the increase in purchasing power after price rises. Subtracting the risk-free rate instead gives the risk premium, which is a different concept.

  1. ANominal return plus the inflation rate
  2. BNominal return minus the inflation rateCorrect
  3. CNominal return multiplied by the inflation rate
  4. DNominal return minus the risk-free rate

Explanation

Real return approximates the purchasing-power gain: nominal return less inflation (exactly, (1+nominal)/(1+inflation) - 1). Adding inflation overstates it. Subtracting the risk-free rate gives a risk premium, not a real return.

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