Asked by Nicholas Alvarez on Jul 02, 2024
Verified
A year ago, you invested $12,000 in an investment that produced a return of 16%. What is your approximate annual real rate of return if the rate of inflation was 4% over the year?
A) 18%
B) 2%
C) 12%
D) 15%
Real Rate of Return
The annual percentage return realized on an investment, adjusted for changes in prices due to inflation or other external factors.
Inflation Rate
The pace at which prices for goods and services elevate overall, causing the value of purchasing power to drop.
- Evaluate the influence of inflation on investment profits and the power to purchase.
Verified Answer
RG
Reymundo GutierrezJul 02, 2024
Final Answer :
C
Explanation :
The real rate of return adjusts the nominal return (16%) for the effect of inflation (4%). Using the approximation formula for real return = nominal return - inflation rate, we get 16% - 4% = 12%.
Learning Objectives
- Evaluate the influence of inflation on investment profits and the power to purchase.