You purchase 100 shares of stock for $50 a share. The stock pays a $2 per share

Question

You purchase 100 shares of stock for $50 a share. The stock pays a $2 per share dividend at year-end. What is the rate of return on your investment for the end-of-year stock prices listed below? What is your real (inflation-adjusted) rate of return? Assume an inflation rate of 3%. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your "Real Rate of Return" answers to 2 decimal places.)

Rate of Return Real Rate of Return a. $48 0%   -2.91%   b. $50 4%   %   c. $52 8%   %  

Explanation / Answer

Answer:b

Real rate of return=[(1+ nominal rate of return)/(1+inflation rate)]-1

=[(1+0.04)/(1+0.03)]-1

=0.97%

c. Real rate of return=[(1+ nominal rate of return)/(1+inflation rate)]-1

=[(1+0.08)/(1+0.03)]-1

=4.85%

Rate of Return Real Rate of Return a. $48 0%   -2.91%   b. $50 4%   0.97% c. $52 8%   4.85%

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