If an investor had a $200,000 long-term capital gain on a $50,000 investment from 1984 to 2010, her real annualized rate of return was most likely

Question

Quizplus · Accepted Answer

To calculate the real annualized rate of return, we need to adjust for inflation. According to the Bureau of Labor Statistics inflation calculator, $50,000 in 1984 is equivalent to $120,424.95 in 2010 dollars. Therefore, the investor's initial investment is $120,424.95 and her total proceeds are $320,424.95 ($200,000 capital gain + $120,424.95 initial investment). The holding period is 26 years (1984 to 2010) so the annualized return is (1 + R)^(1/26) - 1 = 0.108 or 10.8%. Adjusting for inflation, this gives a real annualized rate of return between 11 and 20 percent, making choice B the correct answer.

If an Investor Had a $200,000 Long-Term Capital Gain on a $50,000