Question

7) Jamie Dimon gives me $8,000,000.00 to invest. At the end of the first year I report to Jamie Dimon a loss of 76% for the year. However, at the end of the second year I report a gain of 61% for the year. The average annual return on the portfolio was and the expected annual return on the portfolio in year three is

Answer 1

The average annual return for the given portfolio is calculated below:

$\left (1+i \right )^{2}=\left [\left ( 1-0.76 \right )\times \left ( 1+0.61 \right ) \right ]$

$i=\left [\left ( 1-0.76 \right )\times \left ( 1+0.61 \right ) \right ]^{\frac{1}{2}}-1$

= 0.6216 – 1

$i=-0.3784$

The average annual return is -37.84%.

The expected annual return is:

$Expected\, annual\, return=\frac{-0.76+0.61}{2}$

Expected annual return is -7.50%.