Seven months ago, you purchased a stock at a price of $36.04 a share. Today, you sold those shares for $43.15 a share. During the past seven months, you have received dividends totaling $0.24 a share while inflation has averaged 3.6%. What is your approximate real rate of return on this investment?

Question

Quizplus · Accepted Answer

The real rate of return is calculated by adjusting the nominal return for inflation. First, calculate the nominal return, which includes both the capital gain and dividends received. The capital gain per share is $43.15 - $36.04 = $7.11. Adding the dividends received gives a total return per share of $7.11 + $0.24 = $7.35. The return as a percentage of the initial price is ($7.35 / $36.04) * 100 = 20.4%. To adjust for inflation, use the formula for the real rate of return: [(1 + nominal rate) / (1 + inflation rate)] - 1. Plugging in the numbers: [(1 + 0.204) / (1 + 0.036)] - 1 ≈ 16.2%. The closest option to this calculated value is 16.8%.

Seven Months Ago, You Purchased a Stock at a Price