Assuming you want a detailed answer to the question posed:
The nominal rate of return is the periodic rate of return multiplied by the number of compounding periods per year. In general the higher the number of compounding periods the higher the nominal rate of return.
For example let’s say you have an investment that pays 10% interest per year. If the interest is compounded annually then the nominal rate of return would be 10%. However if the interest is compounded monthly then the nominal rate of return would be 10% x 12 or 120%.
The nominal rate of return is important to understand because it is often used as a benchmark to compare other investments. For example let’s say you are considering two different investments. Investment A has a nominal rate of return of 10% while investment B has a nominal rate of return of 15%. All else being equal investment B would be the better choice because it has a higher nominal rate of return.
However it’s important to note that the nominal rate of return is not the same as the real rate of return. The real rate of return takes into account the effects of inflation which can erode the purchasing power of your investment over time. For example let’s say you have an investment that pays 10% interest per year and is compounded annually. The nominal rate of return would be 10%. However if inflation is 3% per year then the real rate of return would be 10% – 3% or 7%.
While the nominal rate of return is important to understand it’s generally more important to focus on the real rate of return when making investment decisions.
Sources:
https://www.investopedia.com/terms/n/nominalratereturn.asp
https://www.fool.com/knowledge-center/what-is-the-difference-between- nominal-rate-and-real.aspx
What is the nominal rate of return on an investment?
The nominal rate of return is the percentage change in the investment’s market value not accounting for inflation.
What is the real rate of return on an investment?
The real rate of return on an investment is the percentage change in the investment’s market value adjusting for inflation.
How do you calculate nominal rate of return?
You calculate nominal rate of return by subtracting the investment’s purchase price from its current market value and dividing by the purchase price.
How do you calculate real rate of return?
You calculate real rate of return by subtracting the investment’s purchase price from its current market value adjusting for inflation and dividing by the purchase price.
What is an example of nominal rate of return?
An example of nominal rate of return would be if you invested $1000 in a stock that is now worth $1200 your nominal rate of return would be 20%.
What is an example of real rate of return?
An example of real rate of return would be if you invested $1000 in a stock that is now worth $1200 and inflation was 3% your real rate of return would be 17%.
What is the difference between nominal and real rate of return?
The difference between nominal and real rate of return is that nominal rate of return does not account for inflation while real rate of return does account for inflation.
Which is more important nominal or real rate of return?
Real rate of return is more important than nominal rate of return because it provides a more accurate picture of how much your investment has actually grown.
Why is it important to know the rate of return on an investment?
It is important to know the rate of return on an investment because it allows you to compare the performance of different investments and make informed decisions about where to allocate your money.
What is the historical average real rate of return on stocks?
The historical average real rate of return on stocks is about 7%.
What is the historical average real rate of return on bonds?
The historical average real rate of return on bonds is about 3%.
What is the historical average real rate of return on savings accounts?
The historical average real rate of return on savings accounts is about 2%.
What is the historical average real rate of return on gold?
The historical average real rate of return on gold is about 2%.
How does the real rate of return on an investment affect purchasing power?
The real rate of return on an investment affects purchasing power because it determines how much your investment will be worth in terms of purchasing power after inflation.
What are some factors that can affect the real rate of return on an investment?
Some factors that can affect the real rate of return on an investment include inflation fees and taxes.
