Enter the nominal return and the inflation over the same time period to calculate the real return.

## Real Return Formula

The following formula is used to calculate the real return.

rR = NR - I
• Where rR is the real return (%)
• NR is the nominal return (%)
• I is the inflation (%)

## Real Return Definition

Real return is a crucial concept in financial investing that measures the actual increase or decrease in the value of an investment after accounting for inflation. It represents the true growth or decline in purchasing power that an investor experiences.

Real return considers the impact of inflation, which erodes the value of money over time, and provides a more accurate assessment of an investment’s performance.

Inflation is a persistent increase in the general price level of goods and services, leading to a decrease in the purchasing power of a currency.

If the return on an investment does not outpace inflation, the investor’s wealth effectively diminishes. Real return enables investors to assess whether their investments are generating positive or negative growth in real terms, allowing them to make informed decisions and protect their purchasing power.

For example, if an investment generates a nominal return of 5% and inflation during that period is 3%, the real return would be 2%. This means that the investor’s purchasing power has increased by 2%. On the other hand, if inflation exceeds the nominal return, the real return would be negative, indicating a decline in purchasing power.

## Real Return Example

How to calculate real return?

1. First, determine the nominal return.

Calculate the nominal return of the investment. For this example, we will say the return is 25%.

2. Next, determine the inflation rate.

Measure the inflation rate over the same time period. For this example, we will say inflation is 3%.

3. Finally, calculate the real return.

Using the formula we find the real return to be 25% – 3% = 22%.

## FAQ

What is a real return?

A real return is the return on an investment after inflation is taken into account.