CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
An investor needs a portfolio worth USD 1,000,000 in 10 years. Her portfolio is now USD 500,000 and she makes no further contributions. The required annual return is closest to:
The required return is about 7.2% per year. Doubling the portfolio over 10 years requires 2 raised to the power 0.1, minus one, which is 7.18%. Simply dividing 100% by 10 gives 10%, which ignores compounding and is wrong.
- A5.9%
- B7.2%Correct
- C10.0%
Explanation
Required return = (1,000,000/500,000)^(1/10) − 1 = 2^0.1 − 1 = 1.0718 − 1 = 7.18%, about 7.2%. Dividing the 100% total gain by 10 years gives 10.0%, ignoring compounding. 5.9% would result from an incorrect root.
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