Say you own an asset that had a total return last year of 18.5percent. If...

Say you own an asset that had a total return last year of 18.5 percent. If the inflation rate last year was 3 percent, what was your real return?

Expert Solution

Solution:
	Real return was 15.05 % on the asset owned

Working Notes:

Notes:	To know the real rate of return on the asset we have to use Fisher effect formula , where total return will be nominal rate of interest earned .

	As per Fisher effect

	(1+ real rate) (1+inflation) = (1+ nominal rate of interest)
	where real rate is constant

	nominal rate of interest = total return earned =18.5%
	Real rate of return = ??
	Inflation rate = 3%

hence
	(1+ real rate) (1+inflation) = (1+ nominal rate of interest)
	(1+ real rate) (1+ 3%) = (1+ 18.5%)
	(1+ real rate) (1.03) = (1.185)
	Real rate r = (1.185/1.03) - 1
	Real rate r = 0.150485437
	Real rate r = 15.0485437%
	Real rate r = 15.05%

jeff jeffy answered 3 years ago

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