Thread: Can anyone help me with this question as fast as you possible please!!!!!

One of the often made assumptions is that an investment that averages x% over the term of an investment and and investment with a fixed return of x% over the term of the investment are equivalent.
Investigate the assumption to see if it is warranted. Justify and make suggestions re investments.

Originally Posted by Caro

One of the often made assumptions is that an investment that averages x% over the term of an investment and and investment with a fixed return of x% over the term of the investment are equivalent.
Investigate the assumption to see if it is warranted. Justify and make suggestions re investments.

The key here is understanding the exponential growth involved in investments. You see you are earning x% on your initial investment but you are also earning x% on the x% that you earn. Here is an example:

2 year investment of $1000, return 10%

First year $1100
Second year $1210 (notice you earned $110 this year)

2 year investment of $1000, 8% then 12% (average 10%)

First year $1080
Second year $1209.60