Timothy Keating invested $120 in buying a share of company X in June last year. Although the company had announced that it will not pay any dividend, the price of this share has increased over the last few months and is expected to go up to $140 by June this year. If the expected annual inflation rate in June this year is 5%, calculate Timothy's real rate of return from this investment if he sells the share at $140.
A) 11.11%
B) 14.29%
C) −22.22%
D) −10%

Question

Quizplus · Accepted Answer

The real rate of return adjusts the nominal return for inflation. Timothy's nominal return is (($140 - $120) / $120) * 100 = 16.67%. Adjusting for 5% inflation, the real rate of return = ((1 + 0.1667) / (1 + 0.05)) - 1 = 11.11%.

Timothy Keating Invested $120 in Buying a Share of Company