Real return

Return with inflation taken out, so it measures the change in purchasing power. Roughly the nominal return less inflation; exactly, one plus nominal over one plus inflation, less one.

Where you will meet it

Real return appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Contrast gross with net, pre-tax with after-tax, and real with nominal returns
  CFA Level I · Quantitative Methods

  “Nominal return is the headline figure and real return subtracts inflation, which is what determines whether purchasing power rose.”

• Set out how the main asset classes have performed historically in terms of risk and return
  CFA Level I · Portfolio Management

  “Small-company stocks have earned the highest average returns with the highest volatility, followed by large-company stocks, then long-term government bonds, with short-term Treasury bills lowest on both counts; bills have barely kept pace with inflation, so their real return has been close to zero.”

• Set out how an economy's long-run growth rate and the volatility of that growth relate to the typical level of real short-term rates
  CFA Level II · Portfolio Construction

  “In the curriculum's framework, more volatile growth makes investors require a higher real return for deferring spending, so real rates rise with volatility, whereas in standard consumption models more uncertainty prompts precautionary saving, which lowers real rates.”

• Propose planning and investment measures to protect a client's purchasing power from being eroded by inflation
  CFA Level III · Private Wealth Pathway

  “Real return = (1 + nominal return) ÷ (1 + inflation) − 1, so 6% nominal with 3% inflation is about 2.91% real.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with R · Glossary