To calculate the real rate of return, we can use the Fisher equation, which is given by:
\[ 1 + r = \frac{1 + i}{1 + \pi} \]
where:
- \( r \) is the real rate of return,
- \( i \) is the nominal rate of return (expected rate of return), and
- \( \pi \) is the inflation rate.
In this case:
- \( i = 0.12 \) (12%)
- \( \pi = 0.03 \) (3%)
Plugging in the values:
\[ 1 + r = \frac{1 + 0.12}{1 + 0.03} = \frac{1.12}{1.03} \]
Calculating the right side:
\[ 1 + r = \frac{1.12}{1.03} \approx 1.0864 \]
Now, to find \( r \):
\[ r \approx 1.0864 - 1 = 0.0864 \]
Converting this back to a percentage:
\[ r \approx 0.0864 \times 100 \approx 8.64% \]
Therefore, the real rate of return is approximately 8.64%.
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