Which term denotes the percentage of return on an investment over one year after adjustment for inflation or deflation?

Which term denotes the percentage of return on an investment over one year after adjustment for inflation or deflation?

• A. Capital Gains
• B. Realized Profits
• C. Real Rate of Return
• D. Nominal Return

Answer: (C)

Real rate of return is the percentage gain on an investment after removing the effects of inflation or deflation. It shows how much purchasing power the investment actually gained over a year, not just the raw money return. For example, a nominal return of 8% with 3% inflation yields a real return of about 4.85% (calculated as (1.08)/(1.03) − 1). If inflation is 0%, real return equals nominal return; if inflation is higher than the nominal return, the real return can be negative. This is exactly what the question describes. The other terms refer to different ideas: capital gains are price increases in asset value, realized profits are profits from completed sales, and nominal return is the unadjusted return.

Real rate of return is the percentage gain on an investment after removing the effects of inflation or deflation. It shows how much purchasing power the investment actually gained over a year, not just the raw money return. For example, a nominal return of 8% with 3% inflation yields a real return of about 4.85% (calculated as (1.08)/(1.03) − 1). If inflation is 0%, real return equals nominal return; if inflation is higher than the nominal return, the real return can be negative. This is exactly what the question describes. The other terms refer to different ideas: capital gains are price increases in asset value, realized profits are profits from completed sales, and nominal return is the unadjusted return.