An investor bought 1,000 shares of Citigroup in January 2009 for $3.55 a share. She sold all of her shares in December 2009 for $3.31 a share. The inflation rate for 2009 was −0.35%. Which of the following is the investor's real rate of return?
A) −6.43%
B) −6.76%
C) −5.12%
D) 6.43%

Question

Quizplus · Accepted Answer

The real rate of return accounts for the inflation rate and is calculated as follows: $$ \text{Real Rate of Return} = \frac{\text{Ending Value} - \text{Beginning Value}}{\text{Beginning Value}} - \text{Inflation Rate} $$ Given that the shares were bought for $3.55 and sold for $3.31, the nominal rate of return is: $$ \frac{3.31 - 3.55}{3.55} = -0.0676 \text{ or } -6.76\% $$ Adjusting for inflation: $$ -6.76\% - (-0.35\%) = -6.76\% + 0.35\% = -6.41\% $$ The closest answer provided is -6.43%, which accounts for rounding differences in calculations.

An Investor Bought 1,000 Shares of Citigroup in January 2009