The real rate of return is a measure of the change (gain or loss) of an investment adjusted for external factors. By adjusting for external factors, such as inflation, taxes, and fees, investors can compare the the true investment gains or losses in their purchasing power. It is measured over a defined period of time and expressed as a percentage.
Although there are multiple external factors to consider adjusting for, most commonly the real rate of return is estimated by adjusting the nominal rate of return by inflation.
Real rate of return = nominal rate of return – inflation
