NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A client is concerned about the impact of inflation on their purchasing power. If the nominal return on their investment is 8% and the inflation rate is 3%, what is their real rate of return?
- A11%
- B3%
- C8%
- D5%
Show answer & explanationAnswer & explanation
Correct answer: D. 5%
The real rate of return approximates the nominal return minus the inflation rate. In this case, 8% (nominal return) - 3% (inflation rate) = 5% (real rate of return).
Why the other options are wrong
- A. This is the sum of nominal return and inflation, which is incorrect for real return.
- B. This is the inflation rate, not the real rate of return.
- C. This is the nominal return, not adjusted for inflation.
Real Rate of Return
The annual percentage of profit earned on an investment after adjusting for inflation, reflecting the actual increase in purchasing power.
- Approximated as: Nominal Return - Inflation Rate.
- Measures the true growth of an investment's purchasing power.
- Crucial for long-term financial planning.
Memory trick: Nominal is what you see, Real is what you keep after inflation's bite.