Question

Ou invested $4,500 in a project which gave you a return of 14.1% the 1st year. You were quite happy, but the 2nd year wasn't as good. You lost 4.8% that year. The 3rd year was better - you made 7.2% on this investment. What was your annual average rate of return over the three years?

Answer 1

Answer:

5.21%

Explanation:

14.1% or 14.1/100 = +0.141 (gain)

4.8% or 4.8/100 = -0.048 (loss)

7.2% or 7.2/100 = +0.072 (gain)

Firstly, we will add 1 to each annual return

1st year = 0.141 + 1 = 1.141..................R1

2nd year = -0.048 + 1 = 0.952.........R2

3rd year = 0.072 + 1 = 1.072.............R3

Now, we need to calculate the combined percent

(R1*R2*R3)^n . n =3

(1.141*0.952*1.072)^(1/3)

= 1.164440704 ^ (1/3)

=  1.05205665

Annualized average rate of return = Combined % - 1

= 1.05205665- 1

= 0.05205665

= 0.05205665 * 100

= 5.205665%

= 5.21%

So, required annual average rate of return over the three years is 5.21%