Question

A portfolio manager invested $1,800,000 in bonds in 2007. In one year the market value of the bonds dropped to $1,786,000. The interest payments during the year totaled $104,000.

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 2.9%? (Round your answer to 2 decimal places.)

  

Real rate of return

%

Answer 1

(a)

The price of asset at time which is market value of the bonds is 1786000

and the price of asset at prior which is investment is 1800000

The income distributed during the investment period which is interest payment

during the year totaled is 104000

R_t = (Pt - P_t-1 + I_t) / P_t-1

_{= (1786000 - 1800000 + 104000) / 1800000}

_=0.05

_=5%

_{So, the manager total rate of return for the year is 5%}

_(b)

The real rate of return 5% and inflation rates is 2.9%

r = [ (1 + R) / (1 + i)] - 1

=[(1+ 0.05) / (1 + 0.029)] - 1

=(1.05/1.029) - 1

=0.02040816

=2.04%

The manager real rate of return and the inflation rate during the year was 2.9% is 2.04%