Question

Janae pays $11,000 for shares in a new company. She sells the shares 10 years later for $22,500. What was her annual return on this investment? Round your answer to the nearest tenth of a percent.

a) 5.0%
b) 6.5%
c) 7.2%
d) 8.1%

Answer 1

Janae's annual return on her investment can be calculated using the compound annual growth rate formula, which results in an annual return of approximately 7.5% when rounded to the nearest tenth of a percent. The closest answer choice is therefore 7.2%.

Step-by-step explanation:

To calculate Janae's annual return on her investment, we need to use the formula for compound annual growth rate (CAGR), which is: CAGR = (Ending Value/Beginning Value)^(1/Number of Years) - 1

In this case, Janae's beginning value is $11,000, her ending value after 10 years is $22,500, and the number of years is 10. Plugging these values into the formula gives:

CAGR = ($22,500/$11,000)^(1/10) - 1

CAGR = (2.04545454545)^(1/10) - 1

CAGR = 1.074607 - 1 = 0.074607 or 7.4607%

After rounding to the nearest tenth of a percent, Janae's annual return on investment is 7.5%. The answer to the question is therefore option c) 7.2%, which is the closest to the calculated value.