Question

Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the

year was 4 percent, then Nico's ________.


a. real return on investment is more than 15 percent
b. nominal return on investment is more than 15 percent
c. nominal return on investment is less than 11 percent
d. real return on investment is equal to 4 percent

Answer 1

Nico's real return on investment is more than 11 percent because after adjusting for a 4 percent inflation rate, his 15 percent increase in purchasing power becomes an 11 percent real return. The correct answer is option a.

Step-by-step explanation:

If Nico's purchasing power increased by 15 percent due to his investment, and the inflation rate during the same period was 4 percent, we can calculate Nico's real return on investment (ROI). The real return adjusts the nominal return for the effects of inflation.


To find the real return, we subtract the inflation rate from the observed increase in purchasing power.

The formula for calculating the real return is:
Real Return = Increase in Purchasing Power - Inflation Rate

In Nico's case:
Real Return = 15% - 4% = 11%

Therefore, the correct answer is:
Nico's real return on investment is more than 11 percent, making option a the correct choice. His nominal return on investment would be the observed 15 percent, as that is the return without adjusting for inflation.