An investor buys shares worth $12,000, which appreciate by 15% in the first year and then depreciate by 10% in the second year. What is the total value of the investment at the end of two years? - Abbey Badges

Understanding the Context

At the start, the investor purchased shares totaling $12,000. The first year brought a significant boost: a 15% increase in share value. To calculate the gain:

• 15% of $12,000 = 0.15 × $12,000 = $1,800

Adding this appreciation to the initial investment:

• New value after Year 1 = $12,000 + $1,800 = $13,800

Key Insights

This 15% rise demonstrates the potential for strong returns in a favorable market, helping investors visualize the impact of even moderate gains.

Year 2: Baseline Depreciation of 10%

Despite the strong start, the investment faced a correction in the second year. The value declined by 10% from the Year 1 closing amount:

• 10% of $13,800 = 0.10 × $13,800 = $1,380

Subtracting this loss:

Final Thoughts

• Final value after Year 2 = $13,800 – $1,380 = $12,420

This 10% drop reflects common market volatility, reminding investors that portfolio performance can fluctuate even after initial gains.

Final Value After Two Years

At the end of two years, the total value of the $12,000 investment is $12,420. This outcome shows that while short-term price swings are natural, compound growth over time remains a powerful driver of wealth accumulation.

Key Takeaways for Investors

• Sharp appreciation early on can enhance returns, but not sustainably without risk.
  
• Short-term market corrections are common—long-term strategies help weather volatility.
  
• Understanding how percentage gains and losses compound is essential for accurate financial planning.