Question

Assume the annual return for the lowest turnover portfolio is 19% and the annual return for the highest turnover portfolio is 10%. If you invest $105,000 and have the highest turnover, how much lower will the value of your portfolio be at the end of 10 years than if you had had the lowest turnover?

Answer 1

To determine how much lower the highest turnover portfolio would be after 10 years compared to the lowest turnover portfolio, calculate the future value using the compound interest formula for both portfolios and subtract the higher turnover future value from the lower turnover future value.

Step-by-step explanation:

To calculate how much lower the value of a portfolio with the highest turnover would be after 10 years compared to the lowest turnover portfolio, we need to apply the formula for compound interest to both scenarios. For the lowest turnover portfolio with an annual return of 19%, the future value (FV) is calculated as:

FVlow = $105,000 × (1 + 0.19)10 For the highest turnover portfolio with an annual return of 10%, the future value (FV) is calculated as: FVhigh = $105,000 × (1 + 0.10)10 Next, we subtract the future value of the highest turnover portfolio from the future value of the lowest turnover portfolio to determine the difference: Difference = FVlow - FVhigh Using a calculator, the specific values can be computed to find out how much lower the highest turnover portfolio will be. Remember, the power of compound interest is significant in the long-term growth of investments.