Question

Suppose you have invested \$1,000 in a stock whose price is increasing at 10 percent a...

Suppose you have invested \$1,000 in a stock whose price is increasing at 10 percent a year. Your stock broker, who is never wrong, recommends a stock rising at 20 percent a year. Assuming the broker earns 4 percent of the stock’s value on any purchase or sale of the stock, should you take her recommendation?

Answer : Yes, I should take the recommendation of my stock broker. Because stock broker's recommended stock rising by 20% per year. Although the broker gets 4% earning on purchase or sale of stock. Now, if I take my broker's recommendation and buy her recommended stock then I have to pay 4% of stock's vale and when I will sell my stock then again I have to pay 4% of stock's value to my broker. So, totally I have to pay (4 + 4) = 8% of my stock's value to my stock broker. So, if I take my stock broker's recommendation then my net earning on stock is (20 - 8) = 12% per year. While without taking the recommendation of my stock broker my earning is only 10% per year. Hence I should take my stock broker's recommendation.

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