Question

You have been purchasing $12,000 worth of stock annually for the past eight years and now have a portfolio valued at $87,881. What is your annual rate of return?

Answer 1

Answer:

28.3%

Explanation:

The formula to calculate the final amount for compound interest is:

$A=P(1+\frac{r}{n})^{nt}$

where

A is the final amount

P is the principal

r is the rate of return

n is the number of times the interest is compound in a time t

t is the time

Here we have:

P = $12,000 is the principal

A = $87,881 is the final amount

t = 8 y is the time (8 years)

n = 1 , since interest is compounded every year

Therefore, solving for r, we find the rate of return:

$\frac{A}{P}=(1+r)^t\\r=\sqrt[t]{\frac{A}{P}}-1=\sqrt[8]{\frac{87,881}{12,000}}-1=0.283=28.3\%$