Question

What is the (exact) nominal return on an investment that earns a real return of 18.5% while inflation is 6.3%?

Answer 1

The nominal return can be calculated using the Fisher equation:

nominal return = (1 + real return) x (1 + inflation rate) - 1

Plugging in the values given, we get:

nominal return = (1 + 0.185) x (1 + 0.063) - 1

nominal return = 1.252155 - 1

nominal return = 0.252155 or 25.22% (rounded to two decimal places)

Therefore, the exact nominal return on the investment is 25.22%.