A portfolio manager invested $2,300,000 in bonds in 2007. In one year the market

Question

A portfolio manager invested $2,300,000 in bonds in 2007. In one year the market value of the bonds dropped to $2,280,000. The interest payments during the year totaled $92,000.

What was the manager’s total rate of return for the year? (Round your answer to 2 decimal places.)  

What was the manager’s real rate of return if the inflation rate during the year was 2.3%? (Round your answer to 2 decimal places.)

What was the manager’s total rate of return for the year? (Round your answer to 2 decimal places.)  

Explanation / Answer

(A)
Total rate of return = interest payment/invested amount = 92000/2300000 = 0.04 i.e. 4%

(B)
If inflation rate during the year was 2.3%
Real rate of return = 4 - 2.3 = 1.7%

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