The investment consists of 50 shares for $50 each, thus the amount invested was 50 x $50 = $2,500.
After 4 years, the stock is sold for $3,500. This gives a total return of:
[tex]\frac{3,500-2,500}{2,500}=\frac{1,000}{2,500}=0.4[/tex]The total return is 0.4 x 100 = 40%
An annualized total return is the geometric average amount of money earned by an investment each year over a given time period.
Suppose the annual rate is r and it's compounded yearly for 4 years. Since the total return is 40%, the percentage, including the initial investment is 140% = 1.4, thus:
[tex](1+r)^4=1.4[/tex]Applying 4th root:
[tex]1+r=\sqrt[4]{1.4}=1.0877[/tex]Solving for r:
r = 0.0877 = 8.77%
Rounding to one decimal: r = 8.8%
