Homework SourseConsider two investors with 1000 as of December 31 1995 One
Consider two investors with $1,000 as of December 31, 1995. One invests in the corporate bond portfolio, and the other in T-bills. Both investors reinvest all income from their portfolios and liquidate their investments on December 31, 2005. The values of their respective portfolios appear in the table below:
___________________________________________________________
Corporate bond portfolio T-Bills portfolio
___________________________________________________________
December 31, 1995 $1,000 $1,000
December 31, 2005 $4,450 $1,496
___________________________________________________________
Using the information in the table, the geometric mean returns on these portfolios over the 10-year period 1995-2005 were respectively closest to:
A.
345% and 49.6%
B.
49.6% and 345%
C.
16.10% and 4.11%
D.
172.50% and 8.05%
Consider two investors with $1,000 as of December 31, 1995. One invests in the corporate bond portfolio, and the other in T-bills. Both investors reinvest all income from their portfolios and liquidate their investments on December 31, 2005. The values of their respective portfolios appear in the table below:
___________________________________________________________
Corporate bond portfolio T-Bills portfolio
___________________________________________________________
December 31, 1995 $1,000 $1,000
December 31, 2005 $4,450 $1,496
___________________________________________________________
Using the information in the table, the geometric mean returns on these portfolios over the 10-year period 1995-2005 were respectively closest to:
A.
345% and 49.6%
B.
49.6% and 345%
C.
16.10% and 4.11%
D.
172.50% and 8.05%
Consider two investors with $1,000 as of December 31, 1995. One invests in the corporate bond portfolio, and the other in T-bills. Both investors reinvest all income from their portfolios and liquidate their investments on December 31, 2005. The values of their respective portfolios appear in the table below:
___________________________________________________________
Corporate bond portfolio T-Bills portfolio
___________________________________________________________
December 31, 1995 $1,000 $1,000
December 31, 2005 $4,450 $1,496
___________________________________________________________
Using the information in the table, the geometric mean returns on these portfolios over the 10-year period 1995-2005 were respectively closest to:
A.
345% and 49.6%
B.
49.6% and 345%
C.
16.10% and 4.11%
D.
172.50% and 8.05%
Solution
Geometric mean is calculated by following formula
if we have initial amount to be X and terminal amount to be Y after n years then return on investment will be calculated by using Geometric Mean method such as (Y/X)^(1/n)-1
SImilarly in our case we have
Retrun on COrporate Bond portfolio=(4450/1000)^(1/10)-1=16.1010%
Retrun on T-Bill portfolio=(1496/1000)^(1/10)-1=4.11%
Hence Option C is correct response
