16. From the three-year mutual funds investment with an initial investment of $10,000, the annual %...
16. From the three-year mutual funds investment with an initial investment of $10,000, the annual % returns are 20%, -10%, 20%.
A) What is your terminal value of the 3-year investments?
B) What is the (geometric) total rate of return?
C) What is the (geometric) annual average rate of return?
Homework Answers
A]
Terminal value = $10,000 * (1 + 20%) * (1 + (-10%)) + (1 + 20%)
Terminal value = $12,960.
B]
total rate of return = (terminal value - initial investment) / initial investment
total rate of return = ($12,960 - $10,000) / $10,000
total rate of return = 29.60%.
C]
geometric annual average rate of return = (1 + total rate of return)1/n - 1, where n = number of years.
geometric annual average rate of return = (1 + 29.60%)1/3 - 1
geometric annual average rate of return = 9.03%
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