Question

The formula for real rate of return would most likely be used when the adviser wishes to:

A)measure inflation-adjusted performance.
B)analyze investment returns in terms of uneven cash flows.
C)measure risk-adjusted performance.
D)measure after-tax investment performance.

Answer 1

The formula for real rate of return would most likely be used when the adviser wishes to measure inflation-adjusted performance. The real rate of return takes into account the impact of inflation on investment returns.

Step-by-step explanation:

The formula for real rate of return would most likely be used when the adviser wishes to measure inflation-adjusted performance (Option A). The real rate of return takes into account the impact of inflation on investment returns. By subtracting the inflation rate from the nominal rate of return, the real rate of return provides a more accurate measure of the purchasing power gained or lost on an investment.

For example, if an investment has a nominal rate of return of 5% and the inflation rate is 2%, the real rate of return would be 3%. This means that the investment has effectively gained a purchasing power of 3% after accounting for inflation.

Therefore, when an adviser wants to assess the actual purchasing power gained or lost on an investment, they would use the formula for real rate of return to factor in the impact of inflation.