Section: 5 Nominal Return Vs. Real Return
As we all know, value of money diminishes over the period of time due to rising price levels. The goods that you had bought for SR 100.00 in 1995 cannot be purchased today with the same SR 100.00. The reason is inflation. Inflation refers to general rise in price level of necessary household goods and services. Therefore, when computing return you have to provide for inflation to arrive at your real return from the investment.
Real Return = Nominal Return - Inflation