Question

Investor do not need to factor in the expected inflation in their investment expected return calculation given that the inflation rate is generally negligible.

Select one:

True

False

Answer 1

Statement is false

Investors should consider inflation in the expected return of the investment because due to inflation in the economy the value of money invested into investment generally decrease so investors should expect a rate of return which should compensate for the inflation rate aside with a premium for inflation. Generally stated rate of return includes the inflation premium but in actual return what an investor get is net off the inflation so concept of real rate of return should be used in investment decisions as it is the rate of return adjusted for inflation.

Nominal rate of return = stated rate of return

real rate of return = nominal rate of return-inflation rate