Last year, you purchased a stock at a price of $60.00 a share. Over the course of the year, you received $2.90 per share in dividends and inflation averaged 3.4 percent. Today, you sold your shares for $65.60 a share. What is your approximate real rate of return on this investment

Real rate of return= 13.7%

Explanation:

The return on investment is the sum of the dividends earned and capital gains made during the holding period of the investment.

Dividend is the proportion of the profit made by a company which is paid to shareholders.  

Capital gains is another type of the return made on an equity investment as a result of increase in the value of the shares. It is difference between the cost of the share and the value at the time of disposal.

Therefore, we can can compute the return on the investment as follows:

The total return = (2.90) + (65.60-60)= 8.5

To determine the real return, we adjust the nominal return for the impact of inflation as follows:

Real total return ($) =  8.5/1.034=8.220

Total return in (%) = (8.220 /60)× 100= 13.7%

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