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2 April, 09:00

You invested in an aggressive growth fund and expect to earn 12.72% annually over the next five years. However, due to strong growth, inflation is expected to be 6.30%. What should be your expected real rate of return?

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  1. 2 April, 09:07
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    6%

    Explanation:

    The expected real rate of return for the given question can be determined through the below mentioned equation/formula

    (1+i) (1+r) = (1+m)

    In the given question:

    i=expected inflation rate=6.30%

    r=expected real rate of return=?

    m=nominal rate of return=12.72%

    (1+6.30%) (1+r) = (1+12.72%)

    1+r = (1+12.72%) / (1+6.30%)

    1+r=1.060

    r=1.060-1

    r=0.06 or 6%
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