2 value 300 points Exercise 195 Algo A portfolio manager inv

2. value 3.00 points Exercise 19-5 Algo A portfolio manager invested $1,100,000 in bonds in 2007. In one year the market value of the bonds dropped to $1,080,000. The interest payments during the year totaled $115,000 a. What was the manager\'s total rate of return for the year? (Round your answer to 2 decimal places.) Total rate of return: … b. What was the manager\'s real rate of return if the inflation rate during the year was 2%? (Round your answer to 2 decimal places.) Real rate of return Hints References eBook & Resources Hint#1 Type here to search

Solution

1. Total rate of return = (End Value + Interest - Beginning Value) / Invested Amount

Total rate of return = ($1080000 + $115000 - $1100000) / $1100000

Total rate of return = ($95000) / $1100000

Total rate of return = 8.64%

2. Real Rate of Return = [(1 + Nominal Rate) / (1+ Inflation rate)] - 1

Real Rate of Return = [(1 + 8.64%) / (1+ 2%)] - 1

Real Rate of Return = [(1.0864) / (1.02)] - 1

Real Rate of Return = 1.065 - 1 = 6.51%