NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
Which of the following best describes the real rate of return on an investment?
Real rate of return is the nominal return adjusted for inflation, approximately nominal return minus inflation. It shows the actual increase in purchasing power rather than the rupee growth, which is why inflation must be subtracted and not added.
- ANominal return minus the rate of inflation, approximatelyCorrect
- BNominal return plus the rate of inflation
- CReturn earned after deducting only taxes
- DReturn earned before deducting any fund expenses
Explanation
Real return measures the gain in purchasing power, so inflation is subtracted from the nominal return (approximately, or exactly through (1+nominal)/(1+inflation)-1). Adding inflation would overstate the return. Tax and expenses affect post-tax or net returns, not the real return as such.
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