Question

Compute the total and annual return on the following investment.two years after paying $2,000 for shares in a startup company, you sell the shares for $ 1,300 (at a loss).The total return is %  enter your response here%.(Do not round until the final answer. Then round to the nearest tenth as needed.)

Answer 1

The cost (investment) for shares in a company was $2,000. The shares are sold for $1,300 at a loss.

The total return is:

$\frac{1,300-2,000}{2,000}=-\frac{700}{2000}=-0.35$

The total return was -35% in 2 years

The annual return r must satisfy the equation:

$(1+r)^2=1-0.35=0.65$

Solving for r:

$\begin{gathered} 1+r=\sqrt{0.65}=0.8062 \\ \\ r=-0.1938 \end{gathered}$

The annual return was -19.4%