Chapter 7, Problem 1P

To determine

Calculate the rate of return.

Explanation of Solution

Time period is denoted by n and interest rate is denoted by i. Rate of return (i) can be calculated as follows.

$\begin{array}{c}\text{Future value}={\text{Invest}}_{\text{2 year ago}}{\left(1+\text{i}\right)}^{\text{n}}\\ 1,865=\text{1,000}{\left(1+\text{i}\right)}^2\\ \text{i}=0.3675\end{array}$

Rate of return is 36.57%.