Question

The Costaguanan stock market provided a rate of return of 90%. The inflation rate in Costaguana during the year was 75%. In Ruritania the stock market return was 13%, but the inflation rate was only 2%.

a. Calculate the real rate of return for Costaguanan stock market? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. Calculate the real rate of return for Ruritania stock market? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. Which country's stock market provided the higher real rate of return?

Answer 1

a)
	r = (i-g)/(1+g)
	Where,
	r = real interest rate
	i=nominal interest rate
	g= inflation rate
	= (0.9-0.75/ (1+0.75)
	=8.57%
b)
	r = (i-g)/(1+g)
	Where,
	r = real interest rate
	i=nominal interest rate
	g= inflation rate
	= (0.13-0.02/ (1+0.02)
	=10.78%
c)	Ruritania stock market provides higher real rate of return.