Stock A has price $85 on January 1, 2022, price $100 on December 31, 2022, and pays a dividend of $4 in 2022. Inflation is 5.0 percent in 2022.

What is the real return on Stock A in 2022?

Question

Stock A has price $85 on January 1, 2022, price $100 on December 31, 2022, and pays a dividend of $4 in 2022. Inflation is 5.0 percent in 2022.

What is the real return on Stock A in 2022?

BlackTom AI · Accepted Answer

To evaluate the real return, we start by clarifying the cash flows and price changes for Stock A in 2022. The stock price rose from 85 to 100, and a dividend of 4 was paid during the year.

First, compute the nominal (money) return: the total gain is the price appreciation 100 - 85 = 15 plus the dividend 4, for a total gain of 19. The initial investment was 85, so the nominal return is 19/85 ≈ 0.2235, or about 22.35%.

Second, adjust for inflation to obtain the real return. Real return = (1 + nominal return) / (1 + inflation) − 1. With inflation at 5% (0.05), this becomes (1.2235 / 1.05) − 1 ≈ 0.1643, or about 16.43%.

Now evaluate each answer choice against this calculation:
Option 0.64: This would imply a 64% real return, which is far too large given a nominal return of ~22% and 5% inflation. It ignores the scale of the price move and dividend, and misapplies the adjustment for inflation.
Option 0.59: A 59% real return would require either a much larger nominal gain or a multiplicative effect of inflation that is inconsistent with the data. It overstates the impact of the price rise and dividend relative to the starting price. 
Option 0.29: A 29% real return is higher than the calculated ~16% and suggests either a higher nominal return or underestimates inflation’s dampening effect. It does not align with the computed figures. 
Option 0.43: A 43% real return again overestimates the combination of price increase and dividend given the 85 initial price and 5% inflation. The arithmetic indicates a lower real gain. 
Option 0.17: This option is the closest to the computed real return of about 16.4%. It reflects both the 22.35% nominal gain from price and dividend and the 5% inflation dragging the real rate down, yielding a result in the low teens to mid-teens percentage range.

In summary, the nominal gain of 22.35% adjusted for 5% inflation yields a real return of roughly 16.4%, and among the provided choices, the value near 0.17 best matches this result.

Stock A has price $85 on January 1, 2022, price $100 on December 31, 2022, and pays a dividend of $4 in 2022. Inflation is 5.0 percent in 2022. What is the real return on Stock A in 2022?Single choice

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