Final answer:
If the returns on an asset double in value in a single year, the asset will be worth double its original value. This is an application of the concept of compound interest, which can significantly increase the value of an investment over time, particularly with higher rates of return or longer investment periods.
Step-by-step explanation:
If the returns on a particular asset double in value in a single year, it means that the asset's value will become double its original value. This concept is closely related to compound interest, which is the interest calculated on the initial principal and also on the accumulated interest of previous periods. For example, if you have $100, and it doubles in one year, you will have $200 at the end of that year. If we look at compounding annually at a more typical rate, such as a 7% annual rate of return, the original investment grows not just by 7% of the original amount each year but by an increasing amount as the previous years' gains are reinvested.
Understanding compound interest is crucial for making informed investment decisions. For instance, starting to save early in life and taking advantage of compound interest can significantly increase your savings over time. An investment of $3,000 at a 7% real annual rate of return would grow to $44,923 over 40 years due to compound interest. The formula for compound interest is particularly powerful when the rate of return is high or when it is applied over a long period.