If nominal return is 8% and inflation is 3%, what is the approximate real return?

• A. 5%
• B. 11%
• C. 3%
• D. -5%

Answer: (A)

Real return shows how much your purchasing power grows after inflation. When rates are not very high, you can estimate it by subtracting inflation from the nominal return. Here, 8% nominal minus 3% inflation gives about 5% real return. If you want the exact figure, real return is (1.08)/(1.03) − 1 ≈ 0.0485, or about 4.85%, which is still closest to 5%. So the best answer is 5%.