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Real Rate Of Return

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The real rate of return is the rate of return on an investment after taking inflation into account. The nominal rate of return (ignoring inflation) is higher than the real rate of return if inflation is positive. The higher the level of inflation, the larger the difference between the real rate of return and the nominal rate of return. The longer the period of the rate of return, the more important it is to consider the real rate of return. The real rate of return is zero if the nominal rate of return matches inflation. The real rate of return is negative if the nominal rate of return is less than the rate of inflation. Unless inflation is very high, the real rate of return will be very close to the nominal rate of return over short periods.



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