What is the difference between nominal return and real return?

• A. Nominal return is the stated return; real return subtracts inflation to reflect true purchasing power.
• B. Real return is the stated return; nominal return accounts for taxes.
• C. Nominal return includes inflation; real return excludes taxes.
• D. Real return is the average annualized return; nominal return is the total gain.

Answer: (A)

Nominal return is the return you’re quoted with no adjustments, while real return adjusts that number for inflation to show how much your purchasing power actually grew. Inflation erodes money’s value, so real return reflects true wealth growth. For example, if you earn 8% but inflation is 3%, the real return is about 4.85% ((1.08/1.03) − 1). The basic idea is that you care about how much you can buy with what you earn, not just the raw percentage. The other statements blend in taxes or misstate what nominal and real returns represent, which is why they don’t fit as well.