Question

Calculate the real rate of return of a portfolio with an annual rate of 10% during a period when the inflation rate is 3.5% and the risk-free rate is 4.5%.

Answer 1

The real rate of return of the portfolio is calculated to be 6.28% after adjusting the nominal rate of return for an inflation rate of 3.5%.

Step-by-step explanation:

To calculate the real rate of return on a portfolio, we need to adjust the nominal rate of return for inflation. This can be done using the formula:

Real Rate of Return = (1 + Nominal Rate) / (1 + Inflation Rate) - 1

Plugging in the values provided:

Real Rate of Return = (1 + 0.10) / (1 + 0.035) - 1 = 1.10 / 1.035 - 1 = 1.0628 - 1 = 0.0628 or 6.28%

Thus, the real rate of return of the portfolio is 6.28% when the inflation rate is 3.5%.