Question

Assume the annual return for the lowest turnover portfolio is 17% and the annual return for the highest turnover portfolio is 10%. If you invest $108,000 and have the highest turnover, how much lower will the value of your portfolio be at the end of 10 years than if you had had the lowest turnover?

Answer 1

The value of the portfolio with the highest turnover will be approximately $236,250.60 lower than that of the lowest turnover after 10 years, based on compound interest calculations.

To calculate how much lower the value of your portfolio would be at the end of 10 years with the highest turnover portfolio versus the lowest turnover portfolio, you can use the formula for compound interest:

A = P(1 + r)n

For the lowest turnover portfolio (17% annual return), the future value (A) will be:

Alow = $108,000(1 + 0.17)10

And for the highest turnover portfolio (10% annual return), the future value (A) will be:

Ahigh = $108,000(1 + 0.10)10

Calculating these, we get: Alow = $108,000(1 + 0.17)10 = $108,000 × 4.7812 = $516,370.56 (approximately)
Ahigh = $108,000(1 + 0.10)10 = $108,000 × 2.5937 = $280,119.96 (approximately)
The difference between the two values is: Difference = Alow - Ahigh = $516,370.56 - $280,119.96 = $236,250.60
At the end of 10 years, the portfolio value with the highest turnover is $236,250.60 lower than it would have been with the lowest turnover.