math problem

Real Versus Nominal Returns.

A foreign stock market provided a rate of return of 95 percent. The inflation rate in this country during the year was 80 percent. In the United States, in contrast, the stock market return was only 12 percent, but the inflation rate was only 2 percent.
Which country's stock market provided the higher real rate of return?

The real return in the first country was
1.95/1.80 - 1 = 8.3%

In the US is was 1.12/1.02 -1 = 9.8%

So the US stock market performed better in real terms than the foreign market.

Note that I used division rather than subtracting the inflation % from the rate of return %. That is the correct way to adjust for inflation. Subtracting gives an approximate answer that is not accurate at high inflation rates. It would have resulted in 15% for the foreign stock market and 10% for the US.

ok, thanks.
So if the rate was lower, would it then be ok to subtract it, or is it best to use division no matter the scenerio?

It is best to always use division.

  1. 👍 0
  2. 👎 0
  3. 👁 290

Respond to this Question

First Name

Your Response

Similar Questions

  1. Math

    You want to have 1.5 million in real dollars in an account when you retire in 40 yeras. the nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to

    asked by Sally on February 29, 2012
  2. maths

    Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very

    asked by Pan on February 3, 2019
  3. Economics

    The real value of the U.S. dollar is determined by the U.S. government value of goods and services it buys*** U.S. investors in the foreign market foreign investors in the foreign exchange market supply and demand in the open

    asked by TM on December 1, 2018
  4. finance

    Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The company's policy is to allow its dividend to grow at 5 percent for 4 year and then the rate of growth changes to 3 percent per year from year 5

    asked by lynne on July 10, 2010
  5. math

    Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, however, Allen has become very

    asked by pan on February 4, 2019
  1. Finance

    You want to have $2million in real dollars in an account when you retire in 43 years. The nominal return on your investment in 9.939% and the inflation rate is 3.2%. What is the real amount you must deposit each year to achieve

    asked by VicG on October 29, 2016
  2. finance

    10. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The estimated cost of common stock equity is _____ percent. (Please calculate the arithmetic solution and show

    asked by Vanessa on January 11, 2012
  3. Managerial Finance

    Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?

    asked by Alex on January 30, 2011
  4. Real reverse Nominal Returns

    You purchase 100 shares of stock for $40 a share. The stock pays a $2 per share dividend at year-end. What is the rate of return on your investment for these end-of-year stock prices? What is your real (inflation-adjusted) rated

    asked by Antoinette on March 21, 2007
  5. Financial analysis-Need by tomorrow please!!!!!!!!

    If the risk-free rate is 6 percent and the expected rate of return on the market portfolio is 14 percent, is a security with a beta of 1.25 and an expected rate of return of 16 percent overpriced or underpriced?

    asked by Vanessa Belunek on March 25, 2007
  6. finance

    The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10

    asked by san on September 12, 2012

You can view more similar questions or ask a new question.