Jeanette invested $12,000 four years ago. Her arithmetic average return on this investment is 8.72 percent, and her geometric average return is 8.31 percent. What is Jeanette's portfolio worth today?

Question

Quizplus · Accepted Answer

We can use the formula for compound interest to find the portfolio worth today:

A = P(1 + r/n)^(nt)

where A is the total amount, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Using the arithmetic average return, we have:

r = 0.0872
n = 1 (assuming annual compounding)
t = 4

A = 12000(1 + 0.0872/1)^(1*4) = $16,513.84

Using the geometric average return, we have:

r = 0.0831
n = 1 
t = 4

A = 12000(1 + 0.0831/1)^(1*4) = $16,513 (rounded to nearest dollar)

Therefore, the closest answer choice is D) $16,514.

Jeanette Invested $12,000 Four Years Ago