Nominal Return
What Is Nominal Return?
Nominal return is the total investment return earned before adjusting for inflation. It reflects the percentage increase or decrease in the value of an investment over a specific period.
Nominal return measures the change in an investment’s price plus any income it generates, such as dividends or interest.
Why It Matters
Nominal return shows how much an investment has grown in dollar terms. However, it does not account for the impact of inflation on purchasing power.
Investors often compare nominal returns to real returns to understand the true value of their investment gains.
How Nominal Return Works
Nominal return is typically calculated using:
- change in asset price
- dividends or interest income
- total value growth over time
Because it does not adjust for inflation, nominal return may overstate how much an investor’s purchasing power has actually increased.
Example
If an investor earns a 10% return on an investment during a year when inflation is 3%, the nominal return is 10%, but the real return is lower after accounting for inflation.
Nominal Return vs Real Return
- Nominal return measures total return without adjusting for inflation.
- Real return reflects the return after accounting for inflation’s effect on purchasing power.
FAQs About Nominal Return
Why do investors compare nominal and real returns?
Inflation reduces purchasing power, so real return provides a more accurate measure of investment growth.
Is nominal return useful?
Yes. It shows the raw performance of an investment.
Do financial statements report nominal returns?
Most investment performance reports initially present returns in nominal terms.
Related Terms
