An investment offers a nominal return of 9% per annum. If inflation during the same period is 6% per annum, what is the approximate real rate of return earned by the investor, using the simple approximation method taught for exam purposes?

[ A ]Approximately 3%[ CORRECT ]

[ B ]15%

[ C ]9%

[ D ]6%

Takeaway

Option A is correct: approximately 3%.

Derivation

Using the simple approximation method, Real Rate of Return ≈ Nominal Rate of Return − Inflation Rate. Substituting the given values: Real Return ≈ 9% − 6% = 3%. (The more precise Fisher equation, (1 + Real) = (1 + Nominal) / (1 + Inflation), gives 2.83% — the exam-level approximation method rounds this to the simpler subtraction shown here.) This tests whether a candidate understands that inflation erodes the purchasing power of nominal investment gains, not just their headline percentage.

Why the others fail

B — 15%

15% results from adding the nominal return and inflation rate together, the opposite of the correct approximation, which subtracts inflation from the nominal return.

C — 9%

9% ignores the erosive effect of inflation entirely and simply restates the nominal return.

D — 6%

6% restates only the inflation rate, not the investor's actual inflation-adjusted return.