Question

Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment?

a. 24.20%
b. 9.75%
c. 18.15%
d. 13.95%
e. 14.20%

Answer 1

b. 9.75%

Step-by-step explanation:

We know that

Nominal rate of return = Real rate of return + inflation rate

where,

inflation rate is 4.2%

And, the nominal rate of return would be

= {(Selling price - purchase price) × number of shares purchased + dividend} ÷ (purchase price × number of shares purchased)

= {($70.25 - $62.30) × 200 shares + $148} ÷ ($62.30 × 200 shares)

= ($1,738) ÷ ($12,460)

= 13.95%

Then place these values in the formula above,

so the value would be equal to

13.94% = Real rate of return + 4.2%

So, the real rate of return would be

= 13.94% - 4.2%

= 9.74% approx