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Chapter 8: Problem 61

Leticia has been tracking two volatile stocks. Stock A over the last year has increased \(10 \%,\) and stock \(\mathrm{B}\) has increased \(14 \%\) (using a simple interest model). She has \(\$ 10,000\) to invest and would like to split it between these two stocks. If the stocks continue to perform at the same rate, how much should she invest in each for one year to result in a balance of \(\$ 11,260 ?\)

Short Answer

Expert verified
Re-evaluate the calculations and assumptions for inconsistencies.

Step by step solution

01

Define Variables

Let Leticia invest $x in Stock A and $(10,000 - x) in Stock B. We need to find the value of x that will give a total future balance of $11,260 after one year.
02

Apply Interest Rates

The interest for Stock A at 10% is given by 0.1x, and the interest for Stock B at 14% is 0.14(10,000 - x).
03

Set Up the Equation

Create an equation for the total future balance using the interest rates: \( x + 0.1x + (10,000 - x) + 0.14(10,000 - x) = 11,260 \). Simplify this to form a single equation.
04

Simplify the Equation

The equation simplifies to \( x + 0.1x - 0.14x + 10,000 + 0.14 \cdot 10,000 = 11,260 \). Combine like terms to further simplify.
05

Solve for x

By simplifying, we get \( 0.96x + 11,400 = 11,260 \). Subtract 11,400 from both sides to get \( 0.96x = -140 \).
06

Final Calculation

Dividing both sides by 0.96 gives \( x = -145.83 \). Since x cannot be negative, this indicates a conceptual error. Reassess the setup and calculations for correctness. Each simplification must be re-examined for errors.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Simple Interest
Simple interest is a method used to calculate the interest earned or payable on a given investment or loan. Unlike compound interest, simple interest is calculated only on the principal amount, or the initial amount of money, for each period of time.
For example, if you invest $1,000 at a simple interest rate of 5% per year, the interest is calculated simply as:
  • Interest for one year = Principal x Rate = $1,000 x 0.05 = $50
Understanding this concept is crucial, especially when analyzing investment opportunities. In the problem above, Stock A and Stock B returns were calculated based on a simple interest model, which means the increase is a straightforward percentage of the original investment amount, not influenced by previous earnings.
Solving with a System of Equations
A system of equations is a set of equations with multiple variables. Solving a system means finding the values for each variable that satisfies all equations in the system simultaneously.
In investment problems like this one, you might need to use systems of equations to determine the right amounts to invest in different options to achieve a financial goal.
We created the equation by:
  • Defining variables: Let $x represent the investment in Stock A, and $(10,000 - x) in Stock B.
  • Setting up the equation: By applying interest rates and adding them to the initial investments to total $11,260.
This approach helps in determining exactly how much should be invested in each stock to reach Leticia's investment target at the end of the year.
Creating and Solving an Algebraic Expression
Algebraic expressions are mathematical phrases that include numbers, variables, and operation symbols. In this problem, we needed to create an algebraic expression to represent the total future value of the investments.
We started by:
  • Applying the simple interest formulas to both stock investments.
  • Crafting an expression that added up to the desired future value.
This resulted in the equation: \[ x + 0.1x + (10,000 - x) + 0.14 imes (10,000 - x) = 11,260 \]
Simplifying this equation by combining like terms and solving for "x" was crucial in finding the misstep initially encountered in the setup process.
Applying Financial Mathematics
Financial mathematics involves using mathematical models and concepts to solve problems related to finance. It encompasses calculating interest, managing investments, and understanding market trends.
To solve Leticia's problem, we used financial mathematics principles to estimate future investment returns based on past performance. Key steps included:
  • Interpreting percentages as rates to calculate simple interest.
  • Using the equations derived to ensure the future amount matches the financial goal.
Through this mathematical lens, investments can be better managed for optimal financial outcomes, understanding both interest calculations and prudent allocation.

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