Question

You have the following rates of return for a risky portfolio for several recent years: Year 1: 35.23%; Year 2: 18.67%; Year 3: −9.87%; Year 4 23.45%. If you invested $1,000 at the beginning of year 1, how much would your investment at the end of Year 4?

• A. $2,176.60
• B. $1,785.56
• C. $1,645.53
• D. $1,247.87

Answer 1

Answer is $1,785.56

Return, Year 1 = 35.23%
Return, Year 2 = 18.67%
Return, Year 3 = -9.87%
Return, Year 4 = 23.45%

Value of Investment at the end of Year 4 = Amount Invested * (1 + Return, Year 1) * (1 + Return, Year 2) * (1 + Return, Year 3) * (1 + Return, Year 4)
Value of Investment at the end of Year 4 = $1,000 * (1 + 0.3523) * (1 + 0.1867) * (1 - 0.0987) * (1 + 0.2345)
Value of Investment at the end of Year 4 = $1,000 * 1.3523 * 1.1867 * 0.9013 * 1.2345
Value of Investment at the end of Year 4 = $1,000 * 1.78556
Value of Investment at the end of Year 4 = $1,785.56