You purchased an investment for $1,000 on which you earned $120 investment last year.The inflation rate during that time was 3%.What was your real rate of return?
A) 3%
B) 9%
C) 12%
D) 15%
E) None of the above

Question

Quizplus · Accepted Answer

To calculate the real rate of return, we need to adjust the nominal rate of return for inflation. The formula for real rate of return is:
Real Rate of Return = [(1+Nominal Rate of Return)/(1+Inflation Rate)] - 1

Plugging in the values from the problem, we get:
Real Rate of Return = [(1+0.12)/(1+0.03)] - 1
Real Rate of Return = 0.0884 or 8.84%

Therefore, the real rate of return is 8.84%, which is closest to option B (9%).

You Purchased an Investment for $1,000 on Which You Earned