Which equation represents the real rate of return?

The real rate of return is derived from adjusting the nominal interest rate for the effect of inflation, which is captured in the Fisher equation. In this context, the formula used to calculate the real rate of return is given by the equation:

((1+r)/(1+i)) - 1.

Here, 'r' represents the nominal interest rate, and 'i' denotes the inflation rate. The formula essentially reflects how much of the nominal return is actually realized after accounting for inflation. By dividing (1 + r) by (1 + i), you adjust the nominal return in such a way that you eliminate the impact of inflation, thereby determining the real purchasing power increase. By subtracting 1 from this result, we arrive at the real rate of return.

This approach is essential because it allows an investor to understand the true growth of their investment, rather than being misled by the nominal figures that do not take inflation into account. The crucial aspect of this formula is its focus on ensuring that inflation is accounted for, thereby giving a more accurate representation of investment performance over time.