Question

An initial investment of $41,800 fifty years ago is worth $1,533,913 today. What is the geometric average return on this investment?
A)11.08 percent
B)10.47 percent
C)7.47 percent
D)9.23 percent
E)8.02 percent

Answer 1

Answer:

C) 7.47%

Explanation:

Data provided in the question:

Initial investment = $41,800

Time, n  = 50 years

Future value = $1,533,913

Now,

Using the formula of compounding

Future value = Initial investment × ( 1 + r )ⁿ

here,

r is the geometric average return

thus,

$1,533,913 = $41,800 × ( 1 + r )⁵⁰

or

( 1 + r )⁵⁰ = 36.696

or

1 + r = 1.0747

or

r = 0.0747

or

r = 0.0747 × 100%

= 7.47%