Question

An investor bought a stock for $17 (at t=0) and one year later it paid a $2 dividend (at t=1). Just after the dividend was paid, the stock price was $9 (at t=1). Inflation over the past year (from t=0 to t=1) was 8% pa, given as an effective annual rate. Which of the following statements is NOT correct?

a) Nominal capital return of -47.058824% pa.
b)Nominal income return of 11.764706% pa.
c)Real capital return of -42.82353% pa.
d)Real income return of 10.893246% pa.
e)Real total return of -40.087146% pa.

Answer 1

The correct statement is option d) Real income return of 10.893246% pa.

Step-by-step explanation:

The correct statement is option d) Real income return of 10.893246% pa.

To calculate the real income return, we need to adjust the nominal income return for inflation. The nominal income return is calculated as the dividends received divided by the initial stock price. In this case, the dividends received were $2 and the initial stock price was $17, so the nominal income return is 2/17 = 0.11764706 or 11.764706% pa. However, we need to adjust this for inflation. The inflation rate over the past year was 8% pa, so the real income return is 11.764706% - 8% = 3.764706% pa.

The correct statement is option d) Real income return of 10.893246% pa. This is incorrect because the real income return should be 3.764706% pa, not 10.893246% pa.