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CPI and the Real Rate of Return

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- Suppose an investor buys $100,000 of shares in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for $110,000. If the value of the CPI at the date of purchase was 160, and rose by the sale date to 168, what was the investor's real rate of return on this investment?

- Why is it appropriate to use the CPI instead of the Gross Domestic Product Deflator in calculating the real rate of return in this example?

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Solution Summary

This solution looks at the real rate of return of a diversified bundle of stocks taking into account the Consumer Price Index (CPI).

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Real rate of return = [$110,000/168]/[$100,000/160] - 1 = ...

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