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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%.

  1. Calculate the arithmetic and geometric mean rate of return on his investments before tax.
  2. As his financial advisor, what mean (geometric vs. arithmetic) would you present to him and why?
  3. Calculate Peters real after-tax rate of return.

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