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

Which statement about inflation and investment returns is correct?

Real return is approximately the nominal return minus the inflation rate. Nominal returns are quoted before any inflation adjustment, and positive inflation reduces purchasing power, so the real return is lower than the nominal return.

  1. AReal return is always higher than nominal return when inflation is positive
  2. BReal return is approximately nominal return minus the inflation rateCorrect
  3. CInflation increases the purchasing power of fixed deposit interest
  4. DNominal return is calculated after adjusting for inflation

Explanation

Real return is roughly nominal return less inflation (exactly (1+nominal)/(1+inflation) - 1). With positive inflation, real return is lower than nominal. Inflation erodes purchasing power, and nominal return is stated before adjusting for inflation.

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