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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape

An investor puts Rs 1,00,000 in an instrument whose value changes as follows: year 1 it rises 20%, year 2 it falls 20%. What is the value at the end of year 2, and how does the result compare with the arithmetic average return of 0%?

The value is Rs 96,000, which is lower than the 0% arithmetic average suggests. A 20% gain takes Rs 1,00,000 to Rs 1,20,000, and a 20% fall on that larger base removes Rs 24,000, so compounding produces a loss.

  1. ARs 1,00,000; it equals the average
  2. BRs 96,000; it is lower than the arithmetic average impliesCorrect
  3. CRs 1,04,000; it is higher than the arithmetic average implies
  4. DRs 98,000; it is lower than the arithmetic average implies

Explanation

After year 1: 1,00,000 x 1.20 = 1,20,000. After year 2: 1,20,000 x 0.80 = 96,000. The arithmetic average of 0% hides the compounding loss, so the true growth is negative.

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