Simson states that she is very much in favor of a long-term buy-and-hold strategy focused on capital appreciation. She states that investors often do not realize just how much of their investment returns are consumed by taxes, and she provides Jacobs with the data in Exhibit 1 to illustrate the point.
EXHIBIT 1
DATA ILLUSTRATING THE EFFECT OF TAXES ON WEALTH ACCUMULATION
Initial investment$250,000
Holding period25 years
Expected annual gain8%
Tax rate on investment returns10%
Q. Based on the data in Exhibit 1 and assuming that all returns are taxed annually, the proportion of the investment’s return that is consumed by taxes is closest to:
- 19.9%.
- 17.0%.
- 10.0%.
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