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17 Oct 2023, 11:05
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CD assuming 10% gain: $8,000
CD assuming 5% loss: $23,000
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
15%
(low)
Question Stats:
85% (02:54) correct
15%
(03:09)
wrong
based on 773
sessions
History
Date
Time
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Not Attempted Yet
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.
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.
| CD assuming 10% gain | CD assuming 5% loss | |
| $8,000 | ||
| $10,000 | ||
| $20,000 | ||
| $23,000 | ||
| $36,000 |
ShowHide Answer
Official Answer
CD assuming 10% gain: $8,000
CD assuming 5% loss: $23,000
Updated on: 13 Dec 2023, 11:13
Originally posted by MartyMurray on 17 Oct 2023, 13:27.
Last edited by MartyMurray on 13 Dec 2023, 11:13, edited 1 time in total.
Last edited by MartyMurray on 13 Dec 2023, 11:13, edited 1 time in total.
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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:
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:
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:
Correct Answer
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
14 Dec 2023, 03:17
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Paumilpatel
Mohit1994, i have the same question exactly!!
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 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?
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.
