Question

How can investors receive compounding returns? A: by selecting a savings account that has a higher interest rate B: by investing their earnings back into their original investment C: by transferring their earnings into a high risk investment D: by diversifying their investment portfolio

Answer 1

How can investors receive compounding returns? B: by investing their earnings back into their original investment

Further explanation

The investors receive compounding returns by create a savings account that promises the rate of return, invest the interest earned back into the main savings, reallocate the earnings to a higher risk, higher return portfolio and diversify the investment tools. All are follow the basic compounding principles.  They are focused on not just the basic interest you earn.  It is about using the same amount of money to broaden the earnings prospect. The idea is to create multiple forums to draw earnings from the same source.

These investment accounts will continue to grow by earning the compounding returns on the interest. If we wondering how you as an investor can earn compounding returns, we'll need to look for investments that pay compounding returns rather that what is known as simple interest. As an investor looking for compounding returns, your goal is to find an investment vehicle that offers the guaranteed compound interest.

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Answer details

Grade:  9

Subject:   Computers and technology

Chapter:  returns

Keywords:  compounding returns, high risk investment,  investment portfolio, portfolio, savings

Answer 2

The correct answer is option (B).

An investor can earn compounding returns by investing their earnings back into their original investment because when at the same rate of return an additional investment is made then that overall return gets compounded because every penny earned is again invested into the same investment which results in the compounding of returns.

Further Explanation:

A: By selecting a savings account that has a higher interest rate:

The underlying meaning of compounding of returns is that the earned money is again invested in the same investment with the same rate of return and risk. Although if we take a practical situation, a savings account rarely pays a very high rate of interest on the savings.

Therefore, this option is incorrect.

B: By investing their earnings back into their original investment:

The meaning of compounding return is to reinvest the money earned into the same investment again. Therefore, this option is correct.

C: By transferring their earnings into a high risk investment:

When an individual invests in a riskier investment, there are two conditions which are; either the investor will lose its money; or there will be reward of taking that risk which is profit. But to receive compounding returns from a riskier investment is not possible.

Therefore, this option is incorrect.

D: By diversifying their investment portfolio:

Diversifying a portfolio is the best way to manage your investment as it will help an investor to mitigate its risk and it can also expect greater returns from the investment. Although compounding returns are not guaranteed by diversifying a portfolio.

Therefore, this option is incorrect.

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Answer details:

Grade: Senior School

Subject: Finance

Chapter: Risk and Return

Keywords: investor, compounding returns, risk, portfolio, diversification, risky portfolio, savings account, high interest rate, original investment.