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Real Rate Of Return

What is a 'Real Rate Of Return'

A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time. Adjusting the nominal return to compensate for factors such as inflation allows you to determine how much of your nominal return is actually real return.

Explaining 'Real Rate Of Return'

Particularly during periods of high inflation, expressing rates of return in real values rather than nominal values offers a clearer picture of an investment's value.

Nominal vs. Real Values

Interest rates can be expressed in two ways: as nominal rates or real rates. The difference is nominal rates are not adjusted for inflation, while real rates are adjusted. As a result, nominal rates are almost always higher, except during those rare periods when deflation, or negative inflation, takes hold.

Calculating Real Rate of Return

Assume your bank pays you interest of 5% per year on the funds in your savings account. If the inflation rate is currently 3% per year, the real return on your savings is 2%. In other words, even though the nominal rate of return on your savings is 5%, the real rate of return is only 2%, which means the real value of your savings only increases by 2% during a one-year period.


Further Reading


Exposure to exchange-rate movements
www.sciencedirect.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

Determinants of the rate of return for nonresidential real estate: inflation expectations and market adjustment lagsDeterminants of the rate of return for nonresidential real estate: inflation expectations and market adjustment lags
onlinelibrary.wiley.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

The returns to Picasso's prints and to traditional financial assets, 1977 to 1996The returns to Picasso's prints and to traditional financial assets, 1977 to 1996
link.springer.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

The real rate of interest from 1800–1990: A study of the US and the UKThe real rate of interest from 1800–1990: A study of the US and the UK
www.sciencedirect.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

Saving and the real interest rate in LDCsSaving and the real interest rate in LDCs
www.sciencedirect.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

Inflation, financial markets and long-run real activityInflation, financial markets and long-run real activity
www.sciencedirect.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

The real interest rate: An empirical investigationThe real interest rate: An empirical investigation
www.nber.org [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

The rate of return on everything, 1870–2015The rate of return on everything, 1870–2015
academic.oup.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

Indicators of financial developmentIndicators of financial development
www.sciencedirect.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …

How useful is the concept of the natural real rate of interest for monetary policy?How useful is the concept of the natural real rate of interest for monetary policy?
academic.oup.com [PDF]
… (5) that the firm can increase its expected return by ha … Clearly, the key is correlation between exchange-rate movements and those of real asset prices in the domestic … in otherwise Ltefftcient production strategies, these is also an ar j;J$nent for exchange-rate stabilization policies …


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