Question

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? (25 points)

Answer 1

Particulars	Quantity	Unit price	Total Cost	Unit Price after 1 year	Total value after 1 year( B*E)
A	B	C	D	E	F
Debt A	1,000,000	$10	$10,000,000	$12	$12,000,000
Stock B	1,000,000	$40	$40,000,000	$50	$50,000,000
Stock C	2,000,000	$25	$50,000,000	$20	$40,000,000
	Total		$100,000,000		$102,000,000

Computation of Group rate of return on the investment = ( $ 1020,00000-$ 1000,00000)/$ 1000,00000*100

=  $ 20,00000/$ 1000,00000*100

= 2% p.a

Hence the Group rate of return is 2% p.a

But the inflation rate is 4%

We know that inflation decraeses the purchasing power of money.

Real rate of Return = Return on Investment - Inflation rate

= 2% - 4%

= -2% p.a

Therefore the real rate of return is -2% p.a

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