Question

 Rishi Singh has

​$1,600

to invest. His investment counselor suggests that Rishi should buy an investment that pays no interest but will be worth

​$2,100

after

7

years.  

a. What average annual rate of return will Rishi earn with this​ investment?

b. Rishi is considering another​ investment, of equal​ risk, that earns an annual return of  

1.96​%

. Which investment should he​ make, and​ why?

a. The annual rate of return Rishi will earn with this​ investment,

r​,

is

nothing​%.

​(Round to two decimal​ places.)b. Rishi is considering another​ investment, of equal​ risk, that earns an annual return of  

1.96​%

. Which investment should he​ make, and​ why?  ​(Select the best answer​ below.)

A.Rishi should accept the investment that will return

​$2,100

because it has a higher return for the same amount of risk.

B.Rishi should accept the investment that will return

​$2,100

because it has a lower return for the same amount of risk.

C.Rishi should accept the investment with the return of  

1.96​%

because it has a higher return for the same amount of risk.

D.Rishi should accept the investment that will return

​$2,100

because it has a higher return for less risk.

Answer 1

Answer :

Calculation of Average Annual Rate of Return for Rishi:

Rate of Return = Return from the Investment / Investment Amount

Rate of Return for 7 years = ( $2100 - $1600 ) / $1600

= 0.3125 or 31.25 %

31.25% is the rate of return for 7 years.

Therefore Average Annual Rate of Return = 31.25% / 7

= 4.46% annual

Comparison between the two investments and final answer :

As mentioned in the Question that both the investments have equal risk therefore Rishi should select the investment that will give more annual rate of return. The investment that returns $2100 gives annual return of 4.46% and the other investment gives annual rate of return of 1.96%. Therefore first investment that return $2100 and provides 4.46% return annual should be accepted.

From the given options, Option A is correct because this investment has higher return for the same amount of risk, as explained above.

Therefore Option A is the Correct Answer.

Reasoning for other options:

Option B is incorrect because investment that will return $2100 give higher return not lower.

Option C is incorrect because Investment with return of 1.96% has lower return not higher.

Option D is incorrect because Both the investments has same risk.