After an investor purchases $200,000 of an inverse ETF, what will be the value of the investment after a 10% increase on the first day and a 5% decrease on the second day?

To determine the final value of the investment in the inverse ETF after two days, it is essential to take the unique behavior of inverse ETFs into account. An inverse ETF is designed to move in the opposite direction of its benchmark index. Therefore, a 10% increase in the benchmark index would lead to a corresponding decline in the value of the inverse ETF, while a 5% decrease in the benchmark index would have a positive effect on the ETF.

Starting with an investment of $200,000, the first step involves calculating the impact of a 10% increase on the benchmark. An increase of 10% on the benchmark means the value of the inverse ETF will decrease by 10%. Thus, the calculation would be:

• Decrease = 10% of $200,000 = $20,000

• New value after the 10% increase on the benchmark = $200,000 - $20,000 = $180,000

Next, considering the 5% decrease on the benchmark, which would result in an increase in the value of the inverse ETF, we proceed as follows:

• Increase = 5% of $180,000 = $9,000

• New value after the 5% decrease on