NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A financial planner is reviewing a client's portfolio performance. The client's stock portfolio generated a total return of 12% over the last year. During the same period, the Consumer Price Index (CPI) increased by 3%. What was the client's approximate real return on their stock portfolio?
- A4%
- B9%
- C12%
- D15%
Show answer & explanationAnswer & explanation
Correct answer: B. 9%
The approximate real return is calculated by subtracting the inflation rate (CPI increase) from the nominal return. So, 12% - 3% = 9%.
Why the other options are wrong
- A. This is a miscalculation, possibly dividing the nominal return by inflation.
- C. This is the nominal return, not adjusted for inflation.
- D. This incorrectly adds the nominal return and the inflation rate.
Real Return
The return on an investment after adjusting for the effects of inflation, reflecting the actual increase in purchasing power.
- Calculated as Nominal Return - Inflation Rate (approximation).
- Provides a more accurate picture of investment success.
- Essential for long-term financial planning.
Memory trick: Nominal is the headline, Real is the true story after inflation.