please explan the question by word not just calculation Explain what the Rule of

Question

please explan the question by word not just calculation

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?

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

Rule 72 is a shortcut formula used in time value of money to determine the time required to double the investment with compounding.

TIme required to double the return at 10% required rate for stocks is equal to 72/10 = 7.2 years.

Similarly for bonds it will be 72/5 = 14.4 years

And if it is 50/50 mix then average retrun will be 7.5% and time it will take to get double equal to 72/7.5 = 9.6 years

This is an approximation method that's why it gives better approximation for interest rate in between 6 to 10% and generate difference. One cn use 69.3% rule for lower inteest rate that is in 5% case.

Due to approximation it generates difference between correct value and rule of 72.

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