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Nominal Rate of Return
> Introduction

### What is the definition of nominal rate of return?

The nominal rate of return is a financial concept that measures the percentage increase or decrease in the value of an investment over a specific period, without accounting for the effects of inflation. It represents the raw or unadjusted rate of return earned on an investment, solely based on the actual dollar amount gained or lost.

In essence, the nominal rate of return reflects the absolute change in the value of an investment, regardless of whether this change is due to price appreciation or depreciation, interest income, dividends, or any other form of return. It is often expressed as a percentage and is commonly used to compare the performance of different investments or assess the overall profitability of an investment portfolio.

It is important to note that the nominal rate of return does not take into account the impact of inflation, which refers to the general increase in prices over time. Inflation erodes the purchasing power of money, meaning that a given amount of money will be able to buy fewer goods and services in the future. Therefore, when evaluating investment returns, it is crucial to consider the effects of inflation to obtain a more accurate measure of the true purchasing power gained or lost.

To calculate the nominal rate of return, one typically compares the ending value of an investment to its initial value and expresses the difference as a percentage of the initial value. The formula for calculating the nominal rate of return is as follows:

Nominal Rate of Return = (Ending Value - Initial Value) / Initial Value * 100

For example, suppose an individual invests \$10,000 in a stock and sells it after one year for \$12,000. The nominal rate of return would be calculated as:

Nominal Rate of Return = (\$12,000 - \$10,000) / \$10,000 * 100 = 20%

This means that the investment yielded a nominal rate of return of 20% over the one-year period.

It is worth reiterating that the nominal rate of return does not provide a complete picture of an investment's performance, as it does not consider the effects of inflation. To obtain a more accurate measure, investors often use the real rate of return, which adjusts for inflation and provides a more meaningful assessment of an investment's purchasing power.