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Real Rate of Return  

 

Motogopher
(@motogopher)
Active MemberCustomer
Joined: 4 weeks ago
Posts: 11
Topic starter  

I'm confused. The Real ROR used in the Asset Class Table is supposed to be the class ROR (8%) minus inflation (3%) - kind of a net return (5%). The confusing part is why. I'm assuming the Expenses grow with inflation (3%) so doesn't that take care of the inflation part? If inflation is being added to expenses and taken off of growth isn't that doubling up on inflation - an actual 6% effect?


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Stuart Matthews
(@smatthews51)
MemberAdmin
Joined: 5 months ago
Posts: 94
 

There is no doubling-up on inflation within PRC. As you stated, though, there is a relationship between real ROR, nominal ROR and inflation, where in simple terms this is nominal ROR = real ROR + inflation. The Financial Asset > Asset Classes page asks for ROR in real terms (rather than nominal) to enable you to explore the effects of different inflation rates without having to simultaneously modify the ROR of each of your asset classes. As an example, let's say real ROR for a given asset class is 2% and inflation is 3%, thus making nominal ROR 5%. If inflation were to change to 4% then nominal ROR would change to 6%. So, the nominal ROR on your asset classes is a function of inflation and you can change those nominal ROR's by simply changing the inflation rate.

With that as background, PRC does all of its calculations in terms of nominal ROR. It models income streams and expense streams independently (some are fixed, some are indexed along with inflation and some are adjusted at other rates). Then, on a page hidden from the user, all of this is integrated and calculations are done in terms of future year dollars (which is consistent with the use of nominal ROR) and then translated back to today's dollars for some tables and graphs.

Please ask again if this is still unclear.


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