Your investment advisor informs you that you do not need to pay a fee for his services.Instead,he invests your money for one month and keeps all of the proceeds before investing it for you.If your advisor makes and keeps a 1% return on your investment,what is his EAR if the earnings rate could be extrapolated for one year?
A)1.00%
B)12.00%
C)12.68%
D)126.82%

Question

Quizplus · Accepted Answer

The fee the advisor charges is built-in to the return he earns on your investment. Since he earns a 1% return for one month, we can use the formula for EAR to extrapolate that to one year:
EAR = (1 + (1/12))^12 - 1 = 12.68%
Therefore, the advisor's effective annual return (EAR) is 12.68%.

Your Investment Advisor Informs You That You Do Not Need