Question

A portfolio manager invested $1,400,000 in bonds. In one year, the market value of the bonds dropped to $1,381,000. The interest payments during the year totaled $110,000. a. What was the manager's total rate of return for the year? (Round your intermediate calculations to 4 decimal places. Round your answer to 2 decimal places.) Total rate of return % b. What was the manager's real rate of return if the inflation rate during the year was 2.2%? (Round your intermediate calculations to 4 decimal places. Round your answer to 2 decimal places.) Real rate of return %

Answer 1

a)

Given :

P_t = 1,381,000, P_t-1 = 1,400,000, I_t = 110,000

Solution :

The manager's total rate of return for the year is

$R_t = \frac{P_t + I_t - P_{t-1}}{P_{t-1}}$

$R_t = \frac{1381000+110000-1400000}{1400000}$

Total Rate of Return = 6.5%

b)

R = 6.5% = 0.065 , i = 2.2% = 0.022

The manager’s real rate of return if the inflation rate during the year was 2.2% is

$r = \frac{1+R}{1+i} - 1$

$r = \frac{1+0.065}{1+0.022} - 1$

Real rate of Return = 4.2%

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