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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

Kavita invests Rs 2,00,000 in a fund that returns +20% in year 1 and -10% in year 2. What is her approximate compounded annual return over the two years, and the ending value?

The ending value is Rs 2,16,000 and the CAGR is about 3.92%. Multiplying growth factors 1.20 and 0.90 gives 1.08, whose square root is roughly 1.0392. The 5% arithmetic average overstates the true compounded return because it ignores volatility drag.

  1. AEnding value Rs 2,16,000; CAGR about 3.92%Correct
  2. BEnding value Rs 2,20,000; CAGR 5%
  3. CEnding value Rs 2,16,000; CAGR 5%
  4. DEnding value Rs 2,20,000; CAGR about 3.92%

Explanation

Ending value = 2,00,000 x 1.20 x 0.90 = Rs 2,16,000. CAGR = sqrt(1.08) - 1 = 1.0392 - 1 = about 3.92%. The arithmetic mean of 20% and -10% gives 5%, which overstates the return; Rs 2,20,000 wrongly adds returns (20% - 10% = 10%) to the principal.

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