Question

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return?

A)10%.
B)14%.
C)4%.
D)11%.

Answer 1

The correct option is A). The investor's real rate of return, after accounting for dividends, capital gains, and inflation, is approximately 10%. This is calculated by first determining the nominal rate of return and then adjusting for inflation.

Step-by-step explanation:

The question you've asked relates to calculating the real rate of return on an investment considering the dividends received and the capital gains, all adjusted for inflation. To find the real rate of return, we first calculate the nominal return, and then adjust for inflation.

First, let's compute the nominal return on investment (ROI):

• Capital gain per share: $55 (final price) - $50 (initial price) = $5
• Total gain per share including dividends: $5 (capital gain) + $2 (dividends) = $7
• Nominal ROI (percentage): ($7 gain / $50 initial price) * 100 = 14%

Now, let's adjust for inflation to find the real return:

• Inflation rate: 3%
• Real return = [(1 + nominal return) / (1 + inflation rate)] - 1
• Real return = [(1 + 0.14) / (1 + 0.03)] - 1 = 0.1068 or 10.68%

Round this down to the nearest whole number, and you get a real rate of return of approximately 10%. Therefore, the correct answer is A) 10%.