Which statement best defines real return and its use in adviser decisions?

• A. Real return equals nominal return minus inflation; inflation-adjusted return reflects true purchasing power and risk-adjusted performance; used to compare investments.
• B. Real return equals inflation minus nominal return; inflation-adjusted return ignores purchasing power.
• C. Real return is simply the nominal return after taxes.
• D. Real return is the same as the risk-free rate.

Answer: (A)

Real return shows how much an investment actually grows in purchasing power after inflation. It’s calculated by subtracting the inflation rate from the nominal return, so you’re measuring true wealth growth rather than just dollar gains. This matters for adviser decisions because inflation can erode returns, making high nominal gains meaningless if purchasing power doesn’t rise. By focusing on real return, you can compare different investments on a like-for-like basis across time and asset classes, seeing which ones genuinely increase cash-buying power rather than just inflating dollar amounts.

The idea that inflation-adjusted return reflects true purchasing power is key, and it’s this perspective that makes real return a useful comparison tool for investments. Real return isn’t simply the nominal return after taxes, nor is it the same as the risk-free rate; those are separate concepts. Some statements might imply a different subtraction or conflate real return with risk or taxes, but the essential definition and use in adviser decisions center on real return as nominal minus inflation and its role in comparing true growth in purchasing power.