Question

Assume the current CPI is 241. In 20 years, the CPI is expected to be 358. If you are considering an investment with an expected nominal rate of return of 5%, then what is the expected real rate of return for this investment

Answer 1

The expected real rate of return for this investment is -0.21 or -21%

Step-by-step explanation:

`CPI_(i)` = 241,
`CPI_(t)` = 358, nominal rate of return = 5% = 0.05

Calculating for inflation rate, we have:

Inflation rate (IR) =
`(CPI _t - CPI _i)/(CPI _t)` * 100% =
`(358 - 241)/(358)` * 100%

IR = 32.68% ≈ 33% or 0.33

Calculating for inflation rate, we have:

Real rate of return =
`((1 + Nominal rate)/(1 + Inflation rate)) - 1`

RR =
`((1 + NR)/(1 + IR)) - 1` =
`((1 + 0.05)/(1 + 0.33)) - 1`

RR = -0.21 or -21%

The investment loses value over the next 20 years