An investor buys a stock for $1,200 at the beginning of a year.The stock pays him a dividend of $150 over the year, and the worth of the stock appreciates by $300 at the end of the year.If the annual rate of inflation is 6%, what is the loss in principal value due to inflation?

Question

Quizplus · Accepted Answer

The investor's gain from the stock is: 
$150 dividend + $300 appreciation = $450

The inflation rate for the year is 6%, so the inflation factor is (1 + 0.06) = 1.06

The inflation-adjusted value of the investor's initial $1,200 investment is: 
$1,200 / 1.06 = $1,132.08

Therefore, the loss in principal value due to inflation is: 
$1,200 - $1,132.08 = $67.92

Round this to the nearest dollar, we get $68, which is closest to option C, $72.

An Investor Buys a Stock for $1,200 at the Beginning