. A year ago, you invested $12,000 in an investment that produced a return of 16%. What is yourapproximate annual real rate of return if the rate of inflation was 2% over the year?A. 18%.B. 2%.C. 16%.D. 15%.E. none of the above
Question
. A year ago, you invested $12,000 in an investment that produced a return of 16%. What is yourapproximate annual real rate of return if the rate of inflation was 2% over the year?A. 18%.B. 2%.C. 16%.D. 15%.E. none of the above
Solution
The real rate of return is calculated by subtracting the inflation rate from the nominal rate of return.
Step 1: Calculate the nominal rate of return The nominal rate of return is the rate of return before taking inflation into account. In this case, the nominal rate of return is 16%.
Step 2: Subtract the inflation rate from the nominal rate of return The inflation rate is 2%. So, subtract 2% from 16%.
16% - 2% = 14%
So, the approximate annual real rate of return is 14%.
Therefore, the answer is E. None of the above.
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