Question

You are considering an investment that will make 8% over the next year. However, inflation is expected to be 3%. According to the Fisher Equation, what is your approximate real return on the investment?

You bought a stock last year for $55. During the year, it paid a $2 dividend. You’re selling it today for $62. What is your percent return on this investment?

Answer 1

1st question:

according to fisher equation

=>real rate = [(1+ nominal rate) /(1+rate of inflation)] -1

=> [(1.08 / 1.03)]-1

=>1.048544-1

=>4.85%.

real rate =4.85%

2nd question:

percent return on investment = (dividend + selling price - purchasing price) / purchasing price

=>($2 + $62 - 55) / 55

=>0.16363636

=>16.36%

percent return on investment =16.36%.