please answer the question correct: Explain what the Rule of 72 is. How can we u
ID: 2617847 • Letter: P
Question
please answer the question correct:
Explain what the Rule of 72 is. How can we use this when investing? Hint: assume U.S. long term average annual return on stocks is approx. 10%, and on long term bonds 5%. How long will it take to double your money in Stocks? Bonds? A 50/50 mix of both? What is the mathematically correct version of the Rule of 72? Why the difference?
please answer the question correct:
Explain what the Rule of 72 is. How can we use this when investing? Hint: assume U.S. long term average annual return on stocks is approx. 10%, and on long term bonds 5%. How long will it take to double your money in Stocks? Bonds? A 50/50 mix of both? What is the mathematically correct version of the Rule of 72? Why the difference?
Explanation / Answer
FV = PV ( 1+r)n
If Invested in Stock:
FV = PV ( 1+r)n
2 = 1 ( 1 + 0.10 )n
( 1 + 0.10 )n = 2 / 1 i.e 2
(1.10)n = 2
Take Log on both sides
n Log (1.10) = Log 2
n * 0.0414 = 0.3010
n = 7.27 Years
If Invested in Bond:
FV = PV ( 1+r)n
2 = 1 ( 1 + 0.05 )n
( 1 + 0.05 )n = 2 / 1 i.e 2
(1.05)n = 2
Take Log on both sides
n Log (1.05) = Log 2
n * 0.0212 = 0.3010
n = 14.20 Years
If Invested in 50% in Bond & 50% in Equity:
FV = PV ( 1+r)n
2 = 1 ( 1 + 0.075 )n
( 1 + 0.075 )n = 2 / 1 i.e 2
(1.075)n = 2
Take Log on both sides
n Log (1.075) = Log 2
n * 0.0314 = 0.3010
n = 9.59 Years
Acc to Rule 72:
No. of Years to double = 72 / Int rate
Stock = 72 / 10 = 7.2 Years
Bond = 72 / 5 = 14.4 Years
STock & Bond = 72 / 7.5 = 9.6 Years
pls comment, if any further assistance is required.
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