Question

An investment generated returns of -12% in the first year, 26% in the second year and...

An investment generated returns of -12% in the first year, 26% in the second year and 14% in the third year.

A) What is the final value of the investment if the investor invested $10,000 initially?

B) What was the average rate of return on this investment?

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Homework Answers

Answer #1

Intial Investment = $10,000

Return in 1st year = -12%

Total Amount after 1st year = 10,000 * (1 - 0.12)

Total Amount after 1st year = 10,000 * 0.88 = $8,800

Amount after 1st year = $8,800

Return in 2nd year = 26%

Total Amount after 2nd year = 8,800 * (1 + 0.26)

Total Amount after 2nd year = 8,800 * 1.26 = $11,088

Amount after 2nd year = $11,088

Return in 3rd year = 14%

Total Amount after 3rd year = 11,088 * (1 + 0.14)

Total Amount after 3rd year = 11,088 * 1.14 = $12,640.32

A) Final value = $12,640.32

B)

Final Value = $12640.32

Initial Value = $10,000

Return over 3 years = $2640.32

Return % = 2640.32 / 10,000 = 26.40%

Average return over 3 years = 26.40 / 3 = 8.8%

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