Suppose you choose an investment that has historically generated an averagenominal return of 5 percent per year. Explain how inflation and risk may affect your future real rate of return on this investment
What will be an ideal response?
Inflation reduces the buying power of money. Any appreciation in the value of the final balance will need to be adjustedto account for rising prices. In other words, if the prices of goods and services increase during the holding period, the real rate of return on the initial investment is lower than the nominal rate of return.The real rate of return is the nominal rate of return minus the inflation rate.
Risk implies that the return on the investment is not guaranteed. Sothe rate of return that you experience may be greater or lower than the historical average rate of return.
A-head: INVESTMENT RETURNS
Concept: Inflation, risk
You might also like to view...
Which of the following is true of perfect competition but is not true of monopolistic competition?
a. The firm faces a downward-sloping demand curve. b. The firm faces a downward-sloping marginal revenue curve. c. The firm will earn zero economic profit in the long run. d. The firm will produce at a point where price equals marginal cost.
If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant
A) demand; right B) demand; left C) supply; left D) supply; right