Question

You invested in an aggressive growth fund and expect to earn 12.72% annually over the next five years. However, due to strong growth, inflation is expected to be 6.30%. What should be your expected real rate of return?

Answer 1

6%

Step-by-step explanation:

The expected real rate of return for the given question can be determined through the below mentioned equation/formula

(1+i)(1+r)=(1+m)

In the given question:

i=expected inflation rate=6.30%

r=expected real rate of return=?

m=nominal rate of return=12.72%

(1+6.30%)(1+r)=(1+12.72%)

1+r=(1+12.72%)/(1+6.30%)

1+r=1.060

r=1.060-1

r=0.06 or 6%