USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information
Nominal annual return on U.S. government T-bills for year 2018 = 3.5%
Nominal annual return on U.S. government long-term bonds for year 2018 = 4.75%
Nominal annual return on U.S. large-cap stocks for year 2018= 8.75%
Consumer price index January 1, 2018 = 165
Consumer price index December 31, 2018 = 169
-Refer to Exhibit 1.10. Calculate the annual real rate of return for U.S. large-cap stocks.
A) 7.06%
B) 6.18%
C) 4.75%
D) 3.75%
E) 0%

Question

Quizplus · Accepted Answer

To calculate the annual real rate of return, we need to use the formula: (1 + nominal rate) / (1 + inflation rate) - 1. Using the data provided, we can calculate the inflation rate as (169 - 165) / 165 = 0.0242 or 2.42%. Thus, the real rate of return for U.S. large-cap stocks is (1 + 0.0875) / (1 + 0.0242) - 1 = 0.0618 or 6.18%. Therefore, the best choice is B.