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3 years ago

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How Much Capital Do You Need to Start Investing?

1 answer:

vekshin13 years ago

4 0

Answer:

How Much Capital Do You Need to Start Investing?

Jake

If he invests the $10,000 today, the terminal value of this initial investment in 40 years (earning an average 10% return) will be $452,580. This means that he must accumulate the remaining through his annual savings plan to obtain the full $500,000. Still assuming an average return on investment of 10%, the additional yearly investment required to reach Shen’s targeted financial goal within 40 years is $107.11.

Suppose instead that Jake had no capital saved and thus needed to accumulate the entire $500,000 in the next 40 years. In this case, his annual contribution would have to be_$1,129.71__.

When Jake starts with an initial investment of $10,000, the total amount that he ends up contributing to accumulate $500,000 is equal to the initial investment plus the additional yearly payments, for a total of_$14,285___.

When he starts with no initial capital contribution, the amount he ends up contributing is equal to the sum of all annual contributions you calculated in the no-initial-capital scenario, for a total of_$45,188__

Once Jake has determined the annual amount he needs to save, the next step toward achieving his goal is coming up with an investment plan.

The appropriate investment plan depends on the investment objective.

A. True

Explanation:

a) Data and Calculations:

Age of Jake now = 25

Age of Jake at retirement = 65 (25 + 40)

Retirement savings = $10,000

Expected total savings = $500,000

Period of savings = 40 years

Relevant Future Value Factor = 45.258 (40 years at 10% compounded annually)

With the initial retirement savings of $10,000

Jake must Save Every Year Until 65

Amount to Save Every Year: $107.11

Total Principal: $14,285

Total Interest: $485,715

Without the initial retirement savings of $10,000

Jake must Save Every Year Until 65

Amount to Save Every Year: $1,129.71

Total Principal: $45,188

Total Interest: $454,812

The terminal value of $10,000 in 40 years at 10% interest is:

= $10,000 * 45.258 = $452,580

Balance to save = $500,000 = $452,580 = $47,420

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3 years ago

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.9 percent and the market risk premium

Evgesh-ka [11]

Answer:

E 0.95 11.88%

Explanation:

First we have to calculate the market return from market risk premium using the following formula:

Market risk premium=Market return-Risk free return

Market return=3.9%+8.4%=12.3%

Above market return will be applied to the Capital asset pricing model formula for the purpose of calculating expected return.

CAPM=Risk free return+Beta(Market return-Risk free return)

A.

Expected return=3.9%+0.77(12.3%-3.9%)=10.37%

Incorrect because the expected return is 10.37% as compared to the 7.86% given in question.

B.

Expected return=3.9%+1.55(12.3%-3.9%)=16.92%

Incorrect because the expected return is 16.92% as compared to the 12.65% given in question.

C.

Expected return=3.9%+1.36(12.3%-3.9%)=15.32%

Incorrect because the expected return is 15.32% as compared to the 17.33% given in question.

D.

Expected return=3.9%+1.33(12.3%-3.9%)=15.072%

Incorrect because the expected return is 15.072% as compared to the 11.93% given in question.

E.

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Correct because the expected return is 11.88% as given in question.

So the correct option is E.

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4 years ago

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Answer:

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Answer:

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3 years ago