John was figuring out how much his investment might be worth in 30 years. If Joh

Question

John was figuring out how much his investment might be worth in 30 years. If John invested $250,000 for 30 years with a 10% annual rate in 30 years he would have $4,362,351. After a while of thinking John, Mike, and Steven was trying to figure out that it might unlikely to find a return that will payout these term in 30 years. They felt that if the money was invested in stocks it might return higher than 10%, and it could be lower as well. So to help account for the potential variability in the investment returns John and his friends came up with a plan; they assume that he could find an investment that would produce an annual return of 17.5% seventy present of the time and a return (or actually a ) of -7.5% thirty percent of the time. Mike felt certain that this meant John could still expect his $250,000 investment to grow to $4,362,351 in 30 years. Steven thought that Mike was wrong and said that John would see a 17.5% return in 70% of the 30 years or (0.7(30) = 21 years and a -7.5% return in 30% of the 30 years or (0.3(30) = 9 years. So, John should have (1=0.175)21 (1-0.075)9 = $ 3,664,467 after 30 years. But that

Explanation / Answer

17.5%@ probability of 70% yearly -7.5%@ probability of 30% yearly Total investment $250000 for 30 years which should be compounded annually Hence Mike is right

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