Question

Annuities are a series of constant cash flows that have been received over a certain period of time. However, not all annuities are created equal. Some annuities adjust the payments based on certain macroeconomic factors. Growing annuities are a series of payments that grow at a rate. You invested in an aggressive growth fund and expect to earn 19.08% annually over the next five years. However, due to strong growth, inflation is expected to be 9.45%. What should be your expected real rate of return

Answer 1

Answer:

Constant

8.80%

Explanation:

The growing annuities refers to the series of payments that grow at a constant rate

And, the expected real rate of return is

As we know that

Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

= {( 1 + 19.08%) ÷ ( 1 + 9.45%)} - 1

= (1.1908 ÷ 1.0945) - 1

= 8.80%

Simply we applied the above formula to determine the expected real rate of return