Real Return
The annual percentage return on an investment adjusted for the erosive effects of inflation, reflecting true growth in purchasing power.
Systems Engineering Analogy
Net bandwidth after accounting for packet overhead and protocol congestion: subtracting (nominal - inflation) is a close approximation, not exact.
Mathematical SpecificationDeterministic
Real Return = (1 + nominal) / (1 + inflation) - 1Variables:
nominal (r):Stated portfolio return before inflation adjustments
inflation (i):Annual headline inflation rate devaluing purchasing power
Worked Example Scenario
At 8% nominal return and 3% inflation, exact real return is (1.08 / 1.03) - 1 = 4.85%; subtracting (nominal - inflation) is a close approximation, not exact (8% - 3% = 5%).
Featured in: Book 06: The Silent Leak
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