Basic problem about investment (basic percentages, and econ/finance).

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In summary, Liam and Ben have different expectations for inflation, with Liam estimating 5% per year and Ben estimating 4% per year. They have two investment options available, with Fund 1 paying a rate of 8.6% per year and Fund 2 paying a CPI rate + 3.75% per year. Based on their expectations for inflation, Liam should invest in Fund 2 and Ben should invest in Fund 1.
  • #1
thiagowinters
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Liam and Ben are two friends who started studying the world of Finance and have different expectations for inflation in the coming years. Liam estimates inflation of 5% per year and Ben estimates inflation of 4% per year. Suppose they have the following options available for investment:
  1. Fund 1, which pays a rate of 8.6% per year;
  2. Fund 2, which pays a CPI rate (inflation rate) + 3.75% per year.
What should they do?

a) Liam should invest in fund 1 and Ben in fund 2

b) Liam should invest in fund 2 and Ben in fund 1

c) both must invest in fund 1

d) both must invest in fund 2
 
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  • #2
Let the amount invested be A.
Investing in Fund 1 pays 0.086A.

If inflation is 5%, investing in Fund 2 will pay 0.0875A which is more than 0.086A.
If inflation is 4%, investing in Fund 2 will pay 0.0775A which is less than 0.86A.

Liam should in fund 2 and Ben should invest in fund 1.
 

Related to Basic problem about investment (basic percentages, and econ/finance).

1. What is the importance of understanding basic percentages in investment?

Understanding basic percentages is crucial in investment because it allows you to accurately calculate returns and assess the performance of your investments. It also helps you compare different investment options and make informed decisions.

2. How do I calculate the percentage return on my investment?

To calculate the percentage return on your investment, you need to divide the gain or profit by the initial investment amount and multiply it by 100. The resulting number will be the percentage return on your investment.

3. What is the difference between simple and compound interest?

Simple interest is calculated on the initial investment amount only, while compound interest is calculated on the initial amount plus any accumulated interest. This means that compound interest will result in higher returns over time compared to simple interest.

4. How can I mitigate risk in my investments?

One way to mitigate risk in investments is by diversifying your portfolio. This means investing in different types of assets, such as stocks, bonds, and real estate, to spread out your risk. It is also important to research and understand the market before making any investment decisions.

5. What is the role of inflation in investment?

Inflation refers to the general increase in prices of goods and services over time. It can erode the value of your investment, so it is important to consider inflation when making investment decisions. You can protect your investments against inflation by choosing assets that have a higher rate of return than the inflation rate.

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