Answer:
Nominal rate of return (m) = 7%
Inflation rate (i) = 6% = 0.06
Real rate of return = ?
(1+m) = (1+r)(1+i)
(1+ 0.07) = (1 + r)(1 + 0.06)
(1.07) = (1 + r)(1 .06)
1.07/1.06 = 1 + r
1.0094 = 1 + r
r = 1.0094 - 1
r = 0.0094 = 0.94%
Explanation:
In this case, we will apply the above formula where m is the nominal rate of return, i is inflation rate. We will make r the subject of the formula. r represents real risk-free rate.
