Over the past five years a mutual fund experienced annual effective growth rates

ID: 2382648 • Letter: O

Question

Over the past five years a mutual fund experienced annual effective growth rates on

investments of 10%, 16%, -7%, 4%, and 32%. The fund manager suggests the fund

can advertise an average annual growth rate of 11% over the past five years since

(10+16-7+4+32)=5 = 11. If you had invested money at the beginning of the five-year

period, liquidated your investment afterfive years, and had made no further deposits

or withdrawals, what effective annual growth rate would you have experienced? Note:

growth rate = interest rate.

suppose you have invested $ 1 Today ,so value of your fund at the end of 5 year =

1 (1.10 )(1.16)(.93)(1.04)(1.32) = 1.62907

Effective annual growth rate = [ (Ending value / Beginning value)^(1/Number of years) ] - 1

= [ (1.62907 / 1) ^ (1/5) ] -1

= [ 1.62907 ^ .2 ] -1

= 1.1025 -1

= .1025 or 10.25 %

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.