Question

The Costaguanan stock market provided a rate of return of 97%. The inflation rate in Costaguana during the year was 81%. In Ruritania the stock market return was 17%, but the inflation rate was only 4%. Calculate the real rate of return for Costaguanan stock market.

Answer 1

The answer is "
`\bold{8.8\% \ and \ 2.16 \%}`".

Step-by-step explanation:

Fischer relationship centered:

`\to (1 + Nominal\ rate) = (1 + Real\ rate) * (1 + Inflation)\\\\\to \text{For Costaguanan Stock},\\\\\to (1 + 97 \%) = (1 + Real \ rate) * (1 + 81 \%)\\\\`

`\to (1 + 0.97 ) = (1 + Real \ rate) * (1 + 0.81 )\\\\\to (1.97) = (1 + Real \ rate) * (1.81)\\\\ \to (1 + Real \ rate) = (1.97)/(1.81) \\\\\to (1 + Real \ rate) = 1.088 \\\\\to Real \ Rate = 1.088 -1 \\\\`

`= 0.088 \\\\= 8.8\%`

`\text{For Ruritania Stock,}`

`\to (1 + 17 \%) = (1 + Real \ rate) * (1 + 4 \%)\\\\\to (1 + 0.17 ) = (1 + Real \ rate) * (1 + 0.04 )\\\\\to (1.17) = (1 + Real \ rate) * (1.04)\\\\\to (1 + Real \ rate) = (1.17)/(1.04)\\\\\to (1 + Real \ rate) = 1.216\\\\\to Real \ rate = 1.216 -1`

`= 0.216 \\\\=2.16 \%`