Question

Suppose a hedge fund manager earns 1% per trading day. There are 250 trading days per year. Answer the following questions: (a) What will be your annual return on $100 invested in her fund if she allows you to reinvest in her fund the 1% you earn each day?

Answer 1

Answer:

Annual Interest will be $1,103.21

Explanation:

Reinvesting on 1% per working will enable a fund manager to compound the earning to 250 trading days per year.

Use following formula to calculate the the amount investment after compounding 250 days.

F = P ( 1 + r/n )^n

n is the number of period in a year. and r/n is the interest per day which 1%.

F = 100 ( 1 + 0.01 )^250

F = $1,203.22

Return = $1,203.22 - $100 = $1,103.21

Another way:

Effective Annual rate = ( 1 + 0.01)^250 - 1

Effective Annual rate = ( 1.01)^250 - 1

Effective Annual rate = 11.0321 = 1,103.21%

F = 100 x 1103.21% = $1103.21