Question

Your broker correctly tells you that your portfolio's average annual rate of return for the past two years is 10.0%. You know the portfolio value today of

$34,300 is $1,700 less than when you started the account two years ago. What was the portfolio's value one year ago?

a. $23,476       b. 828,406       c. $31,247       d. $25,824       e. $21,342

Answer 1

Answer:

Correct answer is:

e. $21,342

Explanation:

Since average annual rate of return for the past two years is 10.0% but over two years there is a reduction in amount invested by $1,700, there have to be a negative return in Year 1 and a positive return equal to 'absolute value of year 1 negative return plus 20%" in year 2.

We will use excel function of Goal seek:

Initial investment = 34300 + 1700 =$36,000

Assumed return in year 1 = -10%

Year 2 return will be = -(-10%) + 20% =30%

We get below:

The above excel with 'show formula'

Now using excel 'goal seek", setting value of cell B5 to = 34300 by changing cell B2, we get the following:

As calculated value at the end of year 1 = $21,342

As such option e is correct and other options a, b, c and d are incorrect.