To calculate the Real Return:
\[ rR = NR - I \]
Where:
Real return is a crucial concept in financial investing that measures the actual increase or decrease in the value of an investment after accounting for inflation. It represents the true growth or decline in purchasing power that an investor experiences. Real return considers the impact of inflation, which erodes the value of money over time, and provides a more accurate assessment of an investment’s performance.
Inflation is a persistent increase in the general price level of goods and services, leading to a decrease in the purchasing power of a currency. If the return on an investment does not outpace inflation, the investor’s wealth effectively diminishes. Real return enables investors to assess whether their investments are generating positive or negative growth in real terms, allowing them to make informed decisions and protect their purchasing power.
Let's assume the following values:
Using the formula:
\[ rR = 5 - 3 = 2 \text{ %} \]
The Real Return is 2%.
Let's assume the following values:
Using the formula:
\[ rR = 8 - 2 = 6 \text{ %} \]
The Real Return is 6%.
