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Peter Goodman invested $40,000 in the Carters balanced mutual fund 5 years ago and he is looking for advice on whether to sell this investment.
Peter Goodman invested $40,000 in the Carters balanced mutual fund 5 years ago and he is looking for advice on whether to sell this investment. He is really concerned about his return being influenced by inflation. His tax rate is 30% and the inflation rate is 1.5% p.a. Assume that taxes will be paid when he sells the investment. His investment accounts earned the following annual rates of return: +2%, +8%, +5%, +1%, -4%.
- Calculate the arithmetic and geometric mean rate of return on his investments before tax.
- As his financial advisor, what mean (geometric vs. arithmetic) would you present to him and why?
- Calculate Peters real after-tax rate of return.
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