Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share and sold the shares for $59.74 each. During the time he owned the stock, inflation averaged 2.8 percent. What is his approximate real rate of return on this investment?

Question

Quizplus · Accepted Answer

Leo's nominal return is calculated as: ((59.74 + 2.68 - 63.80) / 63.80) * 100 = -6.38%. To find the real rate of return, adjust for inflation: Real return ≈ Nominal return - Inflation rate = -6.38% - 2.8% = -9.18%. However, using the formula for real return: (1 + nominal return) / (1 + inflation rate) - 1, we get: (1 - 0.0638) / (1 + 0.028) - 1 ≈ -4.96%.

Leo Purchased a Stock for $63