Twenty years ago your rich uncle invested $10,000 in an aggressive (i.e., risky) mutual fund. Much to your uncle's chagrin, the value of his investment declined by 18% during the first year and then declined another 31% during the second year. But your uncle decided to stick with this mutual fund, reasoning that long-term sustainable growth of the U.S. economy was bound to occur and enhance the value of his mutual fund. Eighteen more years have passed, and your uncle's cumulative return over the 20-year period is a whopping 507%!
a. What is the value of the original investment now?
b. If inflation has averaged 6% per year over the past 20 years, what is the spending power equivalent of the answer to Part (a) in terms of real dollars 20 years ago?
c. What is the real compound interest rate earned over the 20-year period?
d. During the past 18 years, what compound annual rate of return (yield) was earned on your uncle's investment?