Question

Suppose you purchase one share of the stock of Red Devil Corporation at the beginning of year 1 for $44.75. At the end of year 1, you receive a dividend of $2 and buy one more share for $48.75. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share), and sell the shares for $56.75 each. What is the time-weighted return on your investment? (Round your answer to 2 decimal places. Do not round intermediate calculations.)

Answer 1

Solution :

Year : 0

Price : $ 44.75

Year : 1

Price : $48.75

Dividend : 2

Return : $\frac{48.75+2-44.75}{44.75}$

             = 13.41 %

Year :2

Price : $ 56.75

Dividend : 2

Return : $\frac{56.75+2-48.75}{48.75}$

           = 20.51%

The time weighted return = $\left((1+r_1)\times (1+r_2)\right)^{1/2}-1$

                                           = $\left((1+0.1341)\times (1+0.2051)\right)^{1/2}-1$

                                           = 16.91%

It is also called the geometric return.