Calculate the dollar rates of return on the following assets: A painting whose price rises from $200,000 to $250,000 in a year. A bottle of a rare Burgundy, Domaine de la Romanée-Conti 2011, whose price rises from $255 to $275 between 2013 and 2014. A £10,000 deposit in a London bank in a year when the interest rate on pounds is 10 percent and the $/£ exchange rate moves from $1.50 per pound to $1.38 per pound.

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Business

Gunnar Hobbs

22 December, 13:32

Calculate the dollar rates of return on the following assets: A painting whose price rises from $200,000 to $250,000 in a year. A bottle of a rare Burgundy, Domaine de la Romanée-Conti 2011, whose price rises from $255 to $275 between 2013 and 2014. A £10,000 deposit in a London bank in a year when the interest rate on pounds is 10 percent and the $/£ exchange rate moves from $1.50 per pound to $1.38 per pound.

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Javier Romero · Answer 1

Answer

A. 25%

B. 8%

C. 1.2%

Explanation:

a)

($250,000 - $200,000) / $200,000 = 0.25 or 25%

b)

($275 - $255) / $255 = 0.08 or 8%

Their was No exchange rate movements involved assets & returns all in U. S. dollars

c.

Step 1: £10,000 * $1.50/£ = $15,000 initial $ investment

Step 2: £10,000 * (1.10) = £11,000 at end of year

Step 3: £11,000 * $1.38/£ = $15,180 at end of year

Step 4: ($15,180 - $15,000) / $15,000 =

0.012, or 1.2%