Question

.    I am offering each of you a choice: A nominal return of 7% on your investment...

.    I am offering each of you a choice:

A nominal return of 7% on your investment if you invest in US

A nominal return of 6% on you investment if you invest in Ireland.

Which option will give you the highest real rate of return? (Calculate the average inflation for the last 5 years for each country and use that to calculate the real rate of return. Inflation rate can be found online). (5 PTS)  

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Answer #1

Inflation rate for the two countries is sourced from IMF

http://www.imf.org/external/pubs/ft/weo/2018/01/weodata/weorept.aspx?pr.x=32&pr.y=17&sy=2012&ey=2023&scsm=1&ssd=1&sort=country&ds=.&br=1&c=178%2C111&s=PCPIPCH&grp=0&a=

average inflation for the last 5 years for Ireland = 0.17%
average inflation for the last 5 years for US = 1.32%

Real rate of return formula =

For US

= ((1 + 0.07)/ (1+ 0.0017)) - 1
= 6.81%

For Ireland

= ((1 + 0.06) / (1+ 0.0132)) - 1
= 4.62%

Investment in US would give the highest real rate of return

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