Compounding Interest puzzle | Forex Factory

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Compounding Interest puzzle

  • #1
  • First Post: Nov 17, 2007 11:18am Nov 17, 2007 11:18am
Lets say you have two investors, and both of these investors will see a 2% gain on their investment per week.


One investor is a lone individual with $100 starting equity...


The second investor is actually composed of 10 separate investors, who pooled their 10 separate $100 investments together into a $1000.00 investment pool.


At the end of a three month period (12 weeks,) with a theoretical gain of 2% per week for both types of investors, the lone (single) investor and the group investors (10 separate investors) all decide to take their profits out.


The 10 separate investors divide their profits up 10 ways, and the lone investor, of course, only has his profits to take out.


So my question is this: Will each of the 10 investors see a larger return than the lone single $100 investor? If so, how would you mathematically break this down? Thanks.
Binary Options Trader
  • #2
  • Nov 17, 2007 11:41am Nov 17, 2007 11:41am
single investor of 100 $
100
$102.00
$104.04
$106.12
$108.24
$110.41
$112.62
$114.87
$117.17
$119.51
$121.90
$124.34
$126.82

10 investors 100 $ each
1000
$1,020.00
$1,040.40
$1,061.21
$1,082.43
$1,104.08
$1,126.16
$1,148.69
$1,171.66
$1,195.09
$1,218.99
$1,243.37
$1,268.24
Amount each of the 10 will receive after the total has been divided among them $126.82

this includes compounding....
Same Whore .... Different Dress
  • #3
  • Nov 17, 2007 12:07pm Nov 17, 2007 12:07pm
Quoting johnedoe
single investor of 100 $
100
$102.00
$104.04
$106.12
$108.24
$110.41
$112.62
$114.87
$117.17
$119.51
$121.90
$124.34
$126.82

10 investors 100 $ each
1000
$1,020.00
$1,040.40
$1,061.21
$1,082.43
$1,104.08
$1,126.16
$1,148.69
$1,171.66
$1,195.09
$1,218.99
$1,243.37
$1,268.24
Amount each of the 10 will receive after the total has been divided among them $126.82

this includes compounding....
Thanks! I couldn't quite work it out mathematically myself. So in essence, there is no benefit to the 10 pooled investors, right?
Binary Options Trader
  • #4
  • Nov 18, 2007 11:03pm Nov 18, 2007 11:03pm
There are several calculators available on this subject of compounding if you use the search feature.

Good Luck
  • #5
  • Nov 18, 2007 11:58pm Nov 18, 2007 11:58pm
Think of it this way:

$1000.00 account makes 2% return which is 20 dollars. There are 10 investors, so profit divided by investors will be their individual return. In this case, 2 dollars. 2% on the lone investors 100$ capital is also $2.00, therefore the lone investor and the investor who pooled into a mutual fund have the same profit. After a number of weeks, the differing accounts are still growing at the same rate and thus face the same mathematical model as the first week.
  • #6
  • Nov 19, 2007 10:55am Nov 19, 2007 10:55am
I have a quick question and it might seem a little stupid, am a little confused about % returns in Forex. Take for example, a trader starting with 1k in his account using leverage of 10:1 trades with 10k, makes an average of 10% per month. My question is that in forex, are you talking about 10% returns on his 1k or the actual 10k he's trading with? And also people talks about people wishing to make 40% per year, that sounds crazy to me when you have leverage and compounding to use. Please can someone please clarify this for me!
  • #7
  • Last Post: Nov 19, 2007 2:01pm Nov 19, 2007 2:01pm
Quoting ladex142
I have a quick question and it might seem a little stupid, am a little confused about % returns in Forex. Take for example, a trader starting with 1k in his account using leverage of 10:1 trades with 10k, makes an average of 10% per month. My question is that in forex, are you talking about 10% returns on his 1k or the actual 10k he's trading with? And also people talks about people wishing to make 40% per year, that sounds crazy to me when you have leverage and compounding to use. Please can someone please clarify this for me!
The returns are based on your equity, the 1k. You only need to make around 0.7 percent per week to get an annual return of 40%. This is easier than it sounds though.
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