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Case Study #3 Answer

Calculations

Your annualized rate of return is your return for the total period, annualized, or taking the geometric return.

Your total return for the five-year period is:

(($40*100 - $40*100) + 5*100) / ($40*100) = ?

 12.5%

Taking that return and annualizing for five years gives the following annual returns:

Geometric return = (1 + .125)(1/5) = 2.38%

Average return = 12.5% / 5 = 2.5%

Using either method, it performed better than the bank account.

 



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