Question

an investment that in today's dollars returns 12% of your investment in year 1, 18% in year 2, 11% in year 3, and the remainder in year 4. Rounded to two places, what is the Duration of this investment

Answer 1

3.17 years

Step-by-step explanation:

We can calculate the duration of Investment by duration formula,

Duration= Sum of (PV of each cashflow x year)

PV of each cash flow can be understood as Dolar return % given in the Question.

Year1 Year2 Year3 Year4

Duration= (12% x 1) + (18% x 2) + (11% x 3) + (59% x 4)

Duration= 0.12 + 0.36 + 0.33 + 2.36

Duration= 3.17 years

Note: (100%-12%-18%-11%)59% can be calculated as the remainder of 100% after deducting each year's %.