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An investment offers a total return of 18 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 13 percent. What does Janice believe the inflation rate will be over the next year?

Question

An investment offers a total return of 18 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 13 percent.

 

What does Janice believe the inflation rate will be over the next year?

check_circleAnswer
Step 1

Given,

Total Return (Nominal Return) = 18% or 0.18

Real Return = 13% or...

1+Nominal Returm
-1x 100
Inflation Rate
1+Real Return
1 0.18
-1x100
1 0.13
1.18
-1x100
1.13
=[1.0442-1]x 100
0.0442 x100
= 4.42%
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1+Nominal Returm -1x 100 Inflation Rate 1+Real Return 1 0.18 -1x100 1 0.13 1.18 -1x100 1.13 =[1.0442-1]x 100 0.0442 x100 = 4.42%

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