Question

Define the following terms with examples

(a) Absolute return

(b) Nominal rate of return

(c) Real rate of return

Answer 1

(a) Absolute return

It is a total gain or loss of an investment during holding period of investment.

Suppose, You invested $10,000 and value of your investment in 3 years is $15,000.

Then. Absolute return would be:

(b) Nominal rate of return

It is rate of return before adjusting inflation rate.

(c) Real rate of return

It is rate of return after adjusting inflation rate.

Suppose,

Annual rate of return = 10%

Annual inflation rate = 3%

Then,

Nominal rate of return = 10%

and,

Real rate of return would be:

There is also an approximated real rate of return formula: