Question

The Costaguanan stock market provided a rate of return of 99%. The inflation rate in Costaguana during the year was 81%. In Ruritania, in contrast, the stock market return was only 16%, but the inflation rate was only 3%. Calculate the real rate of return for both the Costaguana and the United States stock markets. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) (Show work)

Real rate of return

Costaguana ____%
United States ____%

Answer 1

Costaguanan- = 9.9%

Ruritania = 12.6%

Step-by-step explanation:

The real rate of return is actual increase in purchasing power that is produced by a an investment. It is the nominal rate of return adjusted for inflation.

The relationship between the inflation, real rate of return and nominal rate of return

Nominal rate + 1 =( Real rate + 1)× (1+ inflation rate)

Real rate = (Nominal rate + 1)/(Inflation rate + 1)

Costaguanan

= (1.99/1.81) - 1

= 0.099447514

= 9.9%

Ruritania

= (1.16/1.03) - 1

= 0.099447514

= 12.6%

Costaguanan- = 9.9%

Ruritania = 12.6%