Question

What was the real rate of return over the past year (from one year ago to today) for a stock if the inflation rate over the past year was 3.36 percent, the risk-free return over the past year was 5.58 percent, the stock is currently priced at 68.57 dollars, the stock was priced at 63.28 dollars 1 year ago, and the stock just paid a dividend of 1.19 dollars? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Answer:

Purchase Price = $63.28
Selling Price = $68.57
Dividend Received = $1.19
Inflation Rate = 3.36%

Nominal Return = (Selling price + Dividend – Purchase Price) / Purchase Price * 100
Nominal Return = ($68.57 + $1.19 - $63.28) / $63.28 * 100
Nominal Return = $6.48/ $63.28 * 100
Nominal Return = 10.24%

Real Return = (Nominal Return – Inflation rate) / (1 + Inflation Rate)
Real Return = (0.1024 - 0.0336) / (1 + 0.0336)
Real Return = 0.0688 / 1.0336
Real Return = 6.66%