Real Rate of Return

Real rate of return

The percentage return on some investments that has been adjusted for inflation.

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Real Rate of Return

The rate of return on an investment after adjusting for inflation. It is calculated simply by taking the gross return and subtracting the inflation rate. For example, if the return on an investment is 7% and the inflation rate is 4%, the real rate of return is 3%.

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Real rate of return. You find the real rate of return on an investment by subtracting the rate of inflation from the nominal, or named, rate of return.

For example, if you have a return of 6% on a bond in a period when inflation is averaging 2%, your real rate of return is 4%. But if inflation were 4%, your real rate of return would be only 2%.

Finding real rate of return is generally a calculation you have to do on your own. It isn't provided in annual reports, prospectuses, or other publications that report investment performance.

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Real Rate of Return

What Does Real Rate of Return Mean?

The annual percentage return realized on an investment, adjusted for changes in prices that result from inflation or other external factors. This method expresses the nominal rate (not adjusted for inflation) of return in real terms, which keeps the purchasing power of a specific level of capital constant over time.

Investopedia explains Real Rate of Return

Adjusting the nominal rate of return to compensate for factors such as inflation allows investors to determine how much of their nominal return is real return. Let's say a bank pays 5% interest per year in an investor's savings account. If the inflation rate is currently 3% per year, the real return on the investor's savings today is 2%. In other words, even though the nominal rate of return on the savings is 5%, the real rate of return is only 2%, which means that the real value of the investor's savings increases only 2% during a one-year period.

Related Terms:
• Earnings
• Equity Risk Premium
• Inflation
• Return on Investment—ROI
• Total Return