Calculating expected returns

Real Rate of Return (RoR) vs Nominal Rate of Return (RoR)

What we calculated above was the “simple” or “nominal rate of return,” a measure of how much the value of something has grown over time compared to when it was purchased.

Another way of thinking of rates of return is on assets that generate interest or yield. A certificate of deposit that pays 3% has a 3% simple or nominal rate of return. But then there’s inflation.

This formula is (1 + the nominal rate)/(1 + inflation rate) -1

So in our example of a 3% yielding CD and a 2% inflation rate, the real rate of return would be

(1+.03)/(1+.02) – 1
.98% = real rate of return

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