Your investment advisor informs you that you do not need to pay a fee

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 2% return on your investment, what is his EAR if the earnings rate could be extrapolated for one year?
A) 2.00%
B) 24.00%
C) 26.82%
D) 126.82%

ANSWER

Answer: C
Explanation: C) EAR = (1 + hpr) (1/n) – 1 = (1.02)(12) – 1 = 26.82%.