NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor puts Rs 1,00,000 in a scheme that returns +50% in year 1 and -50% in year 2. What is the investor's value at the end of year 2 and the CAGR over the two years?
The investment ends at Rs 75,000 and the CAGR is about -13.40% a year. A 50% gain takes Rs 1,00,000 to Rs 1,50,000, and a 50% fall then takes it to Rs 75,000. The arithmetic average of 0% hides this loss because returns compound.
- ARs 1,00,000 and 0%
- BRs 75,000 and about -13.40%Correct
- CRs 75,000 and -25%
- DRs 1,25,000 and about 11.80%
Explanation
Year 1: 1,00,000 x 1.5 = 1,50,000. Year 2: 1,50,000 x 0.5 = 75,000. CAGR = (0.75)^(1/2) - 1 = 0.8660 - 1 = about -13.40%. The arithmetic average of 0% misleads, which is why option A is wrong; option C is the absolute loss, not annualised.
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