Which of the following is NOT correct?

The correct answer is Option (4) → The actual rate of return can be calculated by adding the various expenses into the total money earned.

Each option is checked as a statement; the answer is the one statement that is not true.

Option (1) Nominal rate of return is the total amount of money earned by an investment without considering various expenses. — Correct. The nominal rate of return is the return before expenses such as fees, taxes and inflation are taken into account.

Option (2) The compound annual growth rate is calculated by the final and beginning value of the investment. — Correct. \(\text{CAGR} = \left(\frac{\text{Final value}}{\text{Beginning value}}\right)^{1/n} - 1\) uses only these two values and the number of years.

Option (3) The compound annual growth rate describes the effect of compounding. — Correct. CAGR assumes the returns are reinvested every year, so it shows the effect of compounding.

Option (4) The actual rate of return can be calculated by adding the various expenses into the total money earned. — Incorrect. The actual (real) rate of return is found by subtracting the expenses (and the effect of inflation) from the money earned, not by adding them.