Which of the following statements is correct for an investor starting with $1,000 in common stocks over a 20-year investment horizon in which stocks averaged 11 percent in nominal terms and 4 percent in real terms? The portfolio value is now approximately:

Question

Quizplus · Accepted Answer

Using the formula for future value of a lump sum, we can calculate the portfolio value at the end of 20 years: FV = $1,000(1.11)^20 = $8,062 in nominal terms. This means that the portfolio value has more than 8 times the initial investment. The question only provides information on the average returns in nominal and real terms, but we can assume that the nominal return of 11% includes inflation, since the real return of 4% is lower. Therefore, we do not need to adjust the nominal return for inflation to calculate the future value. The choices A and B are incorrect because they are both in real terms, which means that they take into account inflation. The choice C is incorrect because it only provides the nominal value without adjusting for inflation.

Which of the Following Statements Is Correct for an Investor