Suppose that you have $12,000 in a rather risky investment recommended by your financial advisor. During the first year, your investment decreases by 70 % of its original value. During the second year, your investment increases by 80 % of its first-year value. Your advisor tells you that there must have been a 10 % overall increase in your original $12,000 investment. Is your financial advisor using percentages properly? If not, what is your actual percent gain or loss of your original $12,000 investment?

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Business

Howard Cannon

30 April, 20:05

Suppose that you have $12,000 in a rather risky investment recommended by your financial advisor. During the first year, your investment decreases by 70 % of its original value. During the second year, your investment increases by 80 % of its first-year value. Your advisor tells you that there must have been a 10 % overall increase in your original $12,000 investment. Is your financial advisor using percentages properly? If not, what is your actual percent gain or loss of your original $12,000 investment?

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Brodie Rush · Answer 1

In order to see what happened to our original investment we need to figure out what amount we have at the end of the 2 years.

In the start we have $12,000

we lose 70% of it and are left with 30 %

so 30% of 12000 is 0.3*12,000 = 3,600

Now in year 2 we have a 80% increase so now we have

1.8*3600 = 6,480

So we started with 12,000 and have 6,480 which clearly means that the financial adviser is wrong and we have faced a loss on our investment. To calculate the percentage lost we will subtract 12,000 from 6,480 and divide it by 12,000.

(6,480-12,000) / 12,000 = - 0.46

It means we had a lost of 46% on our investment.