Question

1. ABC Investing had an outstanding rate of return for year 1 of 100% (in the penny

stock market). If you invested $100K at the beginning of the year then you would have

$____________ at the end of year 1. ABC Investing’s marketing team decided not to reveal

their Rate of Return in year 2, but their advertisement states an average of 25% over the

last 2 years. So, the ROR for year 2 was how much? ________% From your money in

year 1, it continued to be invested with ABC Investments in Year 2. How much do you have

at the end of year 2? $_______________, and what do you think about their advertised

ROR?

Answer 1

1. The rate of Return for year 1 is 100%.

Therefore, if we invested $100K at the beginning of the year, we will get 100% return on it i.e. $100K and we would have ($100K+100K)= $200K at the end of year 1.

2. Average Return = (Return of year 1 + Return of year 2)/2

25%= (100% + Return of year 2)/2

50%= (100% + Return of year 2)

50%-100% = Return of year 2

Therefore, the ROR for year 2 was -50%.

3.  We have $100K at the end of year 2.

year	Investment	Return	Ending	Calculation of Return
1	$100K	$100K	$200K	=100*100%
2	$200K	$-100K	$100K	=200*-50%

4. Their advertised ROR is arithmetically correct, but morally not correct. It should give data of yearly ROR mentioning the fact that the ROR was negative in year 2.