CFA CFA Level 1 Question of the Week – Quantitative Methods

Question of the Week – Quantitative Methods

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    • exam_whiz
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        • Undecided
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        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

        • 16.20%
        • 17.40%
        • 18.50%
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        7
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        My calculator shows 17,04% .
        Anyone having the same problem?

      • mitch895
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          • CFA Charterholder
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          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%)

        • NaidenB
          Participant
            • CFA Level 1
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            Actually in year two one holds two stocks: $90 + $3 / $80 = 16.25%.

          • exam_whiz
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              • Undecided
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              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%

            • shannondaily
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                Boo! I got it wrong. :neutral_face: 

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