Final answer:
To calculate the real rate of return on stock investment, include dividends and capital gains, then adjust for inflation. The nominal rate of return is 8.387%. After adjusting for 2.4% inflation, the real rate of return is approximately 5.84%, which is closest to choice (e) 6.0%.
Step-by-step explanation:
To calculate the real rate of return on your stock investment, we should consider both the dividends received and the capital gain from the increase in stock price, adjusted for inflation. You bought the stock at $62.00 and sold it at $65.30, which gives you a capital gain of $3.30 per share. Together with the dividends of $1.90 per share, your total nominal return is $5.20 per share ($3.30 + $1.90). To find the real return, we need to adjust this for inflation of 2.4%, which was the average inflation over the year.
Here is the formula to calculate the nominal rate of return:
- Nominal Return = (Capital Gain + Dividends) / Initial Stock Price
- Nominal Return = ($3.30 + $1.90) / $62.00
- Nominal Return = 0.08387 or 8.387%
After finding the nominal return, we need to adjust it for inflation to find the real rate of return:
- Real Rate of Return = [(1 + Nominal Return) / (1 + Inflation Rate)] - 1
- Real Rate of Return = [(1 + 0.08387) / (1 + 0.024)] - 1
- Real Rate of Return ≈ 0.0584 or 5.84%
Since none of the provided options exactly match the calculated value, we assume that the correct answer is the one closest to our calculation. Therefore, the approximate real rate of return is option (e) 6.0%.