Question

Today, you buy one share of stock costing $50. The stock pays a $2 dividend one year from now. Also one year from now, you purchase a second share of stock for $53. Two years from now you collect a $2 per share dividend and sell both shares of stock for $54 a share. What is your dollar-weighted return?

Answer 1

Answer:

weighted return = 0.0781 = 7.81%

Explanation:

Given data:

stock cost is $50

dividend on stock is $2

cost of new stock $53

share dividend cost from 2 year now = $2

total selling cost for both stock is $54

holding period return for 1st year

$HPR_1 = \frac{(53 - 50) + 2}{50} = 0.10 = 10$%

$HPR_2 =\frac{(53 - 50) + 2*2}{2*53} = 0.0566 = 5.66$%

weighted return $= [(1 +HPR_1) *(1 +HPR_2)]^{1/2} -1$

weighted return $= [(1+ 0.10) *(1+0.0566)]^{1/2} -1$

weighted return = 0.0781 = 7.81%