High school assignment about investment (basic percentages, but also about econ and finance).

Question

Liam and Ben are two friends who started studying the world of Finance and have different expectations for inflation in the coming years. Liam estimates inflation of 5% per year and Ben estimates inflation of 4% per year. Suppose they have the following options available for investment:

1. Fund 1, which pays a rate of 8.6% per year;
2. Fund 2, which pays a CPI rate (inflation rate) + 3.75% per year.

What should they do?

a) Liam should invest in fund 1 and Ben in fund 2

b) Liam should invest in fund 2 and Ben in fund 1

c) both must invest in fund 1

d) both must invest in fund 2

Answer 1

based on their inflation estimates, Liam should invest in Fund 2 since 5% + 3.75% is greater than the 8.6% for fund 1. Ben should stick with fund 1 since 4% + 3.75% is less than the 8.6% for fund 1.