Question

(This problem combines material in Chapters 2 and 3.) You purchase a stock for $50 and sell the stock for $70 after three years.a)What is the annual return on your investment if you bought the stock in a cash account

Answer 1

Answer:

11.87% (12% to the nearest whole percentage)

Explanation:

From the perspective of time value of money,we understand that the value of stock after 3 years is the future value while the initial amount at which it was bought is the present value, on that premise,we can determine the annual rate of return using the formula below which shows the relates future and present values together:

FV=PV*(1+r)^n

FV=future value=$70

PV=present value=$50

r=annual rate of return which is unknown

n=investment timing horizon=3

70=50*(1+r)^3

70/50=(1+r)^3

divide indices on both sides by 3

(70/50)^(1/3)=1+r

r=(70/50)^(1/3)-1

r=11.87%