Stated in textbook "2-yr return =32%, which equal 14.9% at an annual rate"?

[onnfolkz]

How do we arrive at the annual rate of 14.9%?

[Marc155]

It means that, for example, a $1,000 investment will be worth $1,320 at the end of the second year. So you're solving for the rate of the annual return.

Since the investment is for two years, you calculate the square root of 1.32., which equals 1.149. Subtract 1.0 (which represents your original investment) and convert the remainder to a percentage and you're left with 14.9%.

You can double check the result by multiplying 1.149 X 1.149. That result is 1.32, and you've proved the answer.