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Homework answers / question archive / In each of the past 30 years, Sam has deposited $4,500 in his savings account at the beginning of each year
In each of the past 30 years, Sam has deposited $4,500 in his savings account at the beginning of each year. A risk-averse investor, during that period his conservative investment choices averaged a 4.65% annual return. Hugo made the same sized deposits in his own account at the beginning of each year, but he was more of a risk-seeker. Over the same 30 year period, due to his more aggressive investment choices Hugo averaged an investment return of 6.12%. How did Sam's account fare compared to Hugo's, in terms of future value? Did Sam make poor choices? Discuss.
First we calculate Future Value using FV Function in Excel:
=fv(rate,nper,-pmt,pv,type)
For Sam:
Here,
FV = Future Value = ?
Rate = 4.65%
Nper = 30 years
PMT = 4500
PV = 0
Type = 1 (at the beginning)
Substituting the values in formula:
=fv(4.65%,30,-4500,0,1)
FV or Future Value = 294,708.11
For Hugo:
Here,
FV = Future Value = ?
Rate = 6.12%
Nper = 30 years
PMT = 4500
PV = 0
Type = 1 (at the beginning)
Substituting the values in formula:
=fv(6.12%,30,-4500,0,1)
FV or Future Value = 385,604.90
As we can see, Sam account has lower future value compared to Hugo. It is because of Lower rate of return for Sam's account.
High expected returns in the market are almost always accompanied by a lot of risk. So, Sam seems to have less tolerance for risk than Hugo does. But we can not say that Sam made a poor choice.
