Purchased $10,000 in stock, invested $5000 of own money, borrowed remaining $5000 at 8% interest. Stock increases by 10%, what is the rate of the investor's return? I calculated 12%, is that correct?
yes
the value of the stock increased by $1,000 so sold for $11,000.
The investor paid $10,000 + .08*5000 = $10,400
So the investor made $600 on the out of pocket investment of $5,000
(600/5000)*100 = 12 %
To calculate the rate of return for an investment, you need to consider both the gain from the investment and the amount of money invested. Let's break down the calculation step by step:
1. First, let's calculate the gain from the investment. The initial investment was $10,000 in stock, which increased by 10%. So, the gain from the investment is 10% of $10,000, which is 0.10 * $10,000 = $1,000.
2. Now, let's calculate the total amount invested. The investor initially invested $5,000 of their own money and borrowed an additional $5,000 at 8% interest. The interest on $5,000 at 8% is 0.08 * $5,000 = $400. So in total, the amount invested is $5,000 + $400 = $5,400.
3. Finally, to calculate the rate of return, divide the gain from the investment by the total amount invested and express it as a percentage. In this case, the rate of return is ($1,000 / $5,400) * 100% = 18.52%.
Therefore, the correct rate of return for the investor is approximately 18.52%, not 12%.