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# Question of the Week - Quantitative Methods

IllinoisPosts: 68 Sr Associate
edited May 2014
George purchases a share of stock for \$35. At the beginning of the next year, he purchases another share of the same stock for \$40. At the end of each of the two years, the stock pays a dividend of \$1.5. At the end of the second year, George sells both the shares for \$45 each. The time-weighted rate of return that George earns is

## Question of the Week - Quantitative Methods 34 votes

16.2%
8%
17.4%
85%
18.5%
5%

• Posts: 15 Sr Associate
17.4%
My calculator shows 17,04% .
Anyone having the same problem?
• AustraliaPosts: 125 Jr Portfolio Manager
17.4%
George…

Year 1: \$40 + \$1.5 / \$35 = 18.57%
Year 2: \$45 + \$1.5 / \$40 = 16.25%

Therefore total return = 1.1857 x 1.1625 = 1.3784

Annualised = 1.3784^0.5 = 17.4%

…of course the other way to roughly guesstimate it is to jump straight to the holding period return then annualising it…ie… [(\$45 + \$3 dividends)/(\$35)]^0.5 = 17.11%… It's not very accurate but gives a fair idea of where the answer lays (i.e, the difference between this result and any of the 3 multiple-choice selections is: 0.91%, 0.29%, 1.39%)
• ViennaPosts: 9 Associate
17.4%
Actually in year two one holds two stocks: \$90 + \$3 / \$80 = 16.25%.
• IllinoisPosts: 68 Sr Associate
Year 1: (\$40 + \$1.5) / \$35 = 18.57%
Year 2: (\$45 + \$1.5) / \$40 = 16.25%

Time-weighted return = (1.1857*1.1625)^.5 -1 = 17.4%
• St. Louis, MOPosts: 72 Sr Associate
18.5%
Boo! I got it wrong.