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Investor Liu will invest one hundred million dollars into three instruments for one year. Firstly, Liu...

Investor Liu will invest one hundred million dollars into three instruments for one year. Firstly, Liu bought debt A. The original quantity of debt is 1 million and unit price is 10 dollars. After 1 year, the unit price of debt A is 12 dollars. Secondly, Liu bought the stock B with unit price 40 dollars and the quantity is 1 million. After 1 year, the unit price of stock B has been increased to 50 dollars. Thirdly, Liu bought the stock C with unit price 25 dollars and the quantity is 2 million. After 1 year, the unit price of stock C has been decreased to 20 dollars. After 1 year, If Liu sold up the debt A, stock B and stock C, find the total group rate of return for investment? If the inflation rate is 4%, What is the final real rate of return?

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Answer #1

Here,

Total Amount to be invested = 100 million dollars

Investment in debt A = 1 million*10 = 10 million ($10 unit price of Debt A)

Investment in Stock B = 1 million*40 = 40 million ($40 unit price of Stock B)

Investment in Stock C = 2 million *25 = 50 million ($25 unit price of stock C)

Value of Debt A after 1 year = 1 million *12 = 12 million

Value of Stock B after 1 year = 1 million *50 = 50 million

Value of Stock C after 1 year = 2 million *20 = 40 million

So total Value after 1 year = 12+50+40 = 102 million

So Group Return = (102-100)/100*100 = 2%

Now Inflation = 4%

So Real Return = 2-4 = -2%

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