Question

During the past 3 years, your investment returned 6% in the first year, 4% in the second year, lost 9% in the third year. What was the average return on investment over the past three years? If you were to invest for one more year, what is your expected return? please show your answer

Answer 1

Let the initial investment is 100

Future value at the end of 3rd year= 100(1+.06)(1+04)(1-.09)=100.3184

Total rate of return in three years=(value at the end of third year - initial investment)/ initial investment )

=(100.3184-100)/100

= .3184%

Average return on investment in past three years= (total return / number of years)

= (.3184/3)

= .1063% per year

I will be expecting this similar rate of return in next year the average rate of return because that will rational to expect as what I have generated in past three years should be expected in 4th year. So my expected rate of return will be .1063%