Your investment advisor informs you that you do not need to pay a fee for his services.Instead,he invests your money for one month and keeps all of the proceeds before investing it for you.If your advisor makes and keeps a 2% return on your investment,what is his EAR if the earnings rate could be extrapolated for one year?
A)2.00%
B)24.00%
C)26.82%
D)126.82%

Question

Quizplus · Accepted Answer

To calculate the EAR, we need to use the formula:
EAR = (1 + APR/n)^n - 1
where APR is the annual percentage rate and n is the number of compounding periods in a year.
In this scenario, the advisor keeps the 2% returns for one month before investing the money for the client. Therefore, we can assume monthly compounding.
So, APR = 2% and n = 12 (number of months in a year).
EAR = (1 + 0.02/12)^12 - 1
EAR = 0.2682 or 26.82%
Therefore, the answer is C, 26.82%.

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