Question

Over a period of 4 years, a portfolio earns these returns: 14%, 17.5%, -11% and 14.3%....

Over a period of 4 years, a portfolio earns these returns: 14%, 17.5%, -11% and 14.3%.

What is the compound average return (CAGR)? Closest to: a) 6.80 % b) 7.45 % c) 8.10 % d) 8.75 %

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Answer #1

N = no. of years

Suppose the total investment made at the begining is $100. The investment value at the end will be calculated as under-

Year Return earned Investment value at end of the year
1 14% 114
2 17.50% 133.95
3 -11% 119.2155
4 14.30% 136.263 (approx)

The firm will earn 14 $ return on 100 $ for one year. Investment value after 1 year will be $ 114.

In 2nd year the firm will earn 17.50 % return on accumulated investment value of 1st year i.e 17.50 % on 114 $ , Investment value after 2 year will be $ 133.95

Accordingly it will be calculated for 3rd and 4th year. After 4th year total Investment value will become $ 136.263 (approx)

= 1.080425 - 1

= 0.080425

= 8.0425 %

which is closed to option C

Correct option is C.

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