An investor will use $2,000 to purchase 10 shares of a certain stock a

Question

An investor will use $2,000 to purchase 10 shares of a certain stock at $200 per share. At the same time, she will invest another sum of money in a certificate of deposit (CD) that earns 2% simple interest annually. The investor would like to know how much money she should invest in the CD to meet her goal of net earnings (before any taxes or other fees) of $360 from the two investments at the end of one year.

In the table, select for CD assuming 10% gain the amount the investor should invest in the CD to meet her goal under the assumption that the stock price will have increased by 10% at the end of one year, and select for CD assuming 5% loss the amount she should invest in the CD to meet her goal under the assumption that the stock price will have decreased by 5% at the end of one year. Make only two selections, one in each column.

MartyMurray · Accepted Answer

An investor will use $2,000 to purchase 10 shares of a certain stock at $200 per share. At the same time, she will invest another sum of money in a certificate of deposit (CD) that earns 2% simple interest annually. The investor would like to know how much money she should invest in the CD to meet her goal of net earnings (before any taxes or other fees) of $360 from the two investments at the end of one year.

In the table, select for CD assuming 10% gain the amount the investor should invest in the CD to meet her goal under the assumption that the stock price will have increased by 10% at the end of one year, and select for CD assuming 5% loss the amount she should invest in the CD to meet her goal under the assumption that the stock price will have decreased by 5% at the end of one year. Make only two selections, one in each column.

This question is fairly straightforward. So, our goals in answering it will be to execute well so that we don't somehow arrive at an incorrect answer and to answer it relatively quickly to bank extra time for harder questions.

Since the timeframe for the stock price change is one year and the return on the CD is simple annual interest, to determine how much she should invest in the CD, we can use the following:

Return on Stock + Return on CD = 360

Return on CD = 360 - Return on Stock

0.02(Amount Invested in CD) = 360 - Return on Stock

Now, one thing we can do to answer this question quickly is notice that the fact that the specific way she invested $2000 in the stock was by purchasing 10 shares at $200 per share doesn't matter. Regardless of how many shares she bought or the price of those shares, the value of her $2000 stock investment will increase or decrease by the same percentage as the increase or decrease in the stock price.

So, if the stock price price increases 10% and we let  C_1  be the amount she should invest in the CD when the return on the stock is 10%, we have the following:

0.02C_1 = 360 - 0.10(2000)

0.02C_1 = 360 - 200

0.02C_1 = 160

C_1 = 8000

If the stock price decreases 5% and we let  C_2  be the amount she should invest in the CD when the return on the stock is -5%, we have the following:

0.02C_2 = 360 - (-0.05(2000))

0.02C_2 = 360 + 100

0.02C_2 = 460

C_2 = 23,000

Correct Answer   8000, 23,000

KarishmaB · Answer

This is a two part analysis question and I suggest you to check out a few official questions of this type to completely understand what is going on here. Their question stems do get confusing if you are not used to them. 
You have to choose an answer for two columns and each column has a heading. Here those headings are " CD assuming 10% gain " and " CD assuming 5% loss ."

This is what the question stem says:

In the table, select for  CD assuming 10% gain  (heading 1) the amount the investor should invest in the CD to meet her goal under the assumption that the stock price will have increased by 10% at the end of one year, 
and select for  CD assuming 5% loss  (heading 2) the amount she should invest in the CD to meet her goal under the assumption that the stock price will have decreased by 5% at the end of one year.

The highlighted are the headings of the two columns. So they are telling us that under heading 1, select the amount the investor should invest in the CD to meet her goal under the assumption that the stock price will have increased by 10% at the end of one year. The 10% increase will be in the stock price. CD gives a flat 2% we are told.

Similarly, they are telling us that under heading 2, select the amount the investor should invest in the CD to meet her goal under the assumption that the stock price will have decreased by 5% at the end of one year. The 5% decrease will be in the stock price. CD gives a flat 2% we are told.

Heema22 · Answer

MartyMurray  can you please answer this?
the question gives same answers without considering "CD assuming 10% gain ..." and "CD assuming 5% loss ..."

I dont understand their significance here, rather they made me confused and mark the wrong answer thinking whatever cd's value comes, it should be adjusted for some 10% gain or 5% loss.

KarishmaB  can you please help here?

MartyMurray · Answer

Hi guys.

Consider this language in the passage:

In the table, select for  CD assuming 10% gain  the amount the investor should invest in the CD to meet her goal under  the assumption that the stock price will have increased by 10%  at the end of one year, and select for  CD assuming 5% loss  the amount she should invest in the CD to meet her goal under  the assumption that the stock price will have decreased by 5%  at the end of one year.

We see that the point is not that there has been a 10% gain or 5% loss on the CD. Rather, the CD generates the same rate of return in either scenario, and the stock price is assumed to have increased 10% or decreased by 5%.

In other words, "CD assuming 10% gain" is short for "the amount that must be invested in the CD  assuming a 10% gain in the stock price ," and "CD assuming 5% loss" is short for "the amount that must be invested in the CD  assuming a 5% loss in the stock price ."

Hope that helps.

Scarlett128 · Answer

Why not include CD 2% simple interest annually?

KarishmaB · Answer

We are including the 2% interest earned on a CD. 
The question is this: "how much should we invest in a CD to make a total return amount of $360 assuming that a stock investment of $2000 gives 10% profit"

If the stock investment gives 10% on $2000, it means that the stick investment gives $200. 
So the rest of the $360 - $200 = $160 will come from the CD investment.

CD gives 2% on the invested amount and this 2% should be equal to $160

\frac{2}{100} * CD investment = 160

CD investment = $8000

JoeAa · Answer

does it mean that the 'assumption' of gain or loss here is meaningless.

KarishmaB · Answer

No, it is not meaningless. It tells us how much we earned from the stock and what is remaining. The remaining is what we have to earn from the CD. That is the figure we need to find.

mcelroytutoring · Answer

This is a very confusingly worded, two-part analysis DI question. The underlying math is in fact straightforward and easy, but the table's verbiage is not.

With regard to MBA readiness, it also helps to have a basic understanding of investing for this one: in particular, the difference between stock shares (which experience variable gains and losses) vs. CDs (which usually offer fixed interest rates).

The goal is to  profit $360  from both investments.  We are already told that the CD gains exactly 2% per year, simple interest. Thus, when it says in the table "CD assuming 10% gain," we must assume this to mean  a 10% gain in the $2,000 the investor bought in stock shares , despite the fact that the table's wording is deceptive, and instead suggests—nonsensically—that the CD is making this gain.

(2000)(.1) = 200, so there is $160 left in profit to make from the 2% CD to reach $360.

.02a = $160, a = $8,000

Likewise, when it says in the table "CD assuming 5% loss," we must assume this to mean  a 5% loss from the $2,000 of shares the investor bought in stock, not a 5% loss from the CD itself .

(2000)(-.05) = -100, so there is $460 left in profit to make from the 2% CD to reach $360.

.02b = 460, b = $23,000

sayan640 · Answer

target income = 360
Amount invested in stock = 2000
If he makes 10% gain on the stock , that amount can be deducted from the target income.
10% of 2000 = 200
Hence 160 = x * 2/100
x= 8000

If he makes 5% loss , that amount has to be earned in addition to the target income.
5% of 2000 = 100
460 = x * 2/100
x= 23000

anushahada · Answer

Won't we assume 2000 being subtracted from CD? 
So if the principal amount is 10,000 and 2000 of that is invested in stocks; won't we have to consider that?

Bunuel · Answer

No.

The problem says she uses 2,000 to buy the stock, and at the same time invests  another sum  in the CD. So the CD principal is separate money, not part of the 2,000.

BetaZinc · Answer

It's 8000 and 23,000 respectively. Explaining this in simple steps above.

Step 1: When 10% gain happens, 10% of 2000 = 200.
Total Gain required= 360

Equation:
200 + SI (From CD) = 360 (Use, P x R x T/100 formula)
SI= 160
2 x P/100=360
X= 8000

Similarly,
5% dip on $2000, means loss of 100 (-100)
 
Form the Equation:
-100 + SI = 360
SI= 460
P=23,000

Hence, answers.

An investor will use $2,000 to purchase 10 shares of a certain stock a

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CD assuming 10% gain	CD assuming 5% loss
		$8,000
		$10,000
		$20,000
		$23,000
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GMAT Two-part Analysis (TPA) Questions

An investor will use $2,000 to purchase 10 shares of a certain stock a

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My Rewards