Question

8. You purchased shares of stock one year ago at a price of $63.80 per share. During the year, you received dividend payments of $2.03 and sold the stock for $70.92 per share. If the inflation rate during the year was 2.59 percent, what was your real return?

Answer 1

First we compute the nominal rate of return -

Nominal rate of return = [(Dividend + Capital gain) / Purchase price] x 100 = [(2.03 + 70.92 - 63.80) / 63.80] x 100 = 14.341692789%

Now, we have the following relationship between real rate, inflation and nominal rate of return -

(1 + real rate) = (1 + nominal rate) / (1 + inflation rate)

or, (1 + real rate) = (1 + 0.14341692789) / (1 + 0.0259)

or, (1 + real rate) = 1.11455008079

or, Real rate = 0.11455008079 or 11.455008079% or 11.46%