Question

Question 2
On 1 January 2020, Belinda and Janice invested $200,000 in stock of Company X, a utility company. Belinda plans to reinvest all returns in the same stock to the next years. Janice plans to invest additional $150,000 in Stock X at the end of 2021. Janice will handle all returns of Stock X in the same way as Belinda.

Estimated returns of Stock X in coming years are shown as below:

Year	Estimated Returns
2020	5.3%
2021	2.8%
2022	-10.4%

1. a) Calculate the estimated average annual return earned by Belinda.

2. b) State the formula to calculate estimated average annual return earned by Janice.
   

3. c) Without any calculations, compare and explain the difference of average annual return earned by Belinda and Janice.

Answer 1

a)

Average Annual Return earned by Belinda = Simple Average of Returns of all 3 years = (5.3+2.8-10.4)/3 = -0.767%

b)

Formula to calculate estimated average annual return earned by Janice = Weighted Average Return(taking Dollars as weight)

= [{200000*5.3}+{350000*2*(2.8-10.4)/2}]/{200000+350000}

= -2.91%

c)

Average Annual Return earned by Janice will be LESS than that of Belinda. If we look at the returns, Return earned in 1st month is highest and return earned in next 2 years are lower. In fact, 3rd years is a loss. Therefore, as Janice has invested more money in next 2 years, her average annual return will be lower than that of Belinda.