Real rate of return

The real rate of return is the percentage return on an investment that has been reduced by the rate of inflation during the investment period. For example, if the return on an investment is 8% and the inflation rate is 6%, then the real rate of return is just 2%. This is a useful concept when evaluating investments in a high-inflation environment, and especially when the preservation of capital is a key investing goal.

The most accurate use of this concept is to employ an inflation rate that is most applicable to the investor, which is not necessarily the consumer price index. Instead, a more applicable inflation rate might be derived for a certain industry sector or geographic region.

Related Courses

Capital Budgeting 
Financial Analysis