A real rate of return is defined as a rate that has been adjusted for which one of the following?

• A. Market risk
• B. Inflation
• C. Taxes
• D. Transaction costs

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'real rate of return': The real rate of return is the return on an investment after adjusting for the effects of inflation. It reflects the true purchasing power of the returns earned.
2. Identify the key adjustment factor: Inflation is the primary factor that erodes the purchasing power of money over time. Therefore, the real rate of return accounts for this by removing the impact of inflation from the nominal rate of return.
3. Differentiate from other factors: Market risk, taxes, and transaction costs are not directly related to the calculation of the real rate of return. These factors may affect investment decisions but are not part of the inflation adjustment.
4. Use the formula for real rate of return: The formula is typically expressed as: $\mathrm{Real} \mathrm{Rate} \mathrm{of} \mathrm{Return}=(1+\mathrm{Nominal} \mathrm{Rate})/(1+\mathrm{Inflation})-1$. This formula adjusts the nominal rate of return for inflation.
5. Apply the concept: When analyzing investment returns, always consider the real rate of return to understand the actual growth in purchasing power, as opposed to just the nominal growth.