Question

On the distant planet of Zurg, the stock market had a return last year of -60%. This year, due to an economic recovery, the stock market had a return of +100%. What was an investor’s effective annual return over this two-year period? If the investor requires an annual return of 10% to be happy, is the investor happy?

you must show supporting work, or describe the numbers you input to your calculator (i.e., enter PMT = 2000; i = 5%; n = 20. Solve for PV = ZZZ).

Answer 1

Assume initial investment =$100

Year 1 Return =-60%=-0.6

Value of investment at the end of year 1=X

(X/100)-1=-0.6

X/100=1-0.6=0.4

X=$40

Value of investment at the end of Year 1=$40

Value of investment at the end of Year 2=Y

Year 2 return =100%=1.0

(Y/40)-1=1.0

Y/40=1+1=2

Y=2*40=$80

Original investment =$100

Effective annual return =R

Future Value (F)=Present Value(P)*((1+R)^N)

F=$80

P=$100

N=2

80=100*((1+R)^2)

((1+R)^2)=80/100=0.80

1+R=0.8^(1/2)=0.8944

Effective Annual Return =R=0.8944-1=-0.1056

Effective Annual Return =-10.56%

If the investor requires an annual return of 10% to be happy, i investor IS NOT happy because , he received Negative return