Question

If you require a real growth in the purchasing power of your investment of 5.1%, and you expect the rate of inflation over the next year to be 2.1%, what is the lowest nominal return that you would be satisfied with?

Enter answer in percents, to two decimal places.

Answer 1

(1 + Nominal rate of return) = (1 + Real rate of return)(1 + Inflation rate)

(1 + Nominal rate of return) = (1 + 0.051)(1 + 0.021)

Nominal rate of return = [(1 + 0.051)(1 + 0.021)] - 1

Nominal rate of return = 0.0731 or 7.31%