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Asked Dec 22, 2019
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Distinguish the nominal rate of return from the real rate of return.

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Nominal Rate of Return: Nominal rate of return refers to the rate of return of an investment project without considering the effect of business risk. Real Rate of Return: Real rate of return refers to the rate of return of an investment project which considers the effect of risk free return and business risk.

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Difference between nominal rate of return from the real rate of return: • Real rate of return considers the effect of business risk over annual return on investment which is not considered in nominal rate of return. Formula to calculate real rate: Real rate = Risk free rate + Risk premium for premium risk Formula to calculate nominal rate: (1+ Real rate) x (1+ Inflation rate) Nominal rate

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