CFA CFA Level 1 Question of the Week – Quantitative Methods

# Question of the Week – Quantitative Methods

• Author
Posts
• exam_whiz
Participant
• Undecided
28

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%
• 7

My calculator shows 17,04% .
Anyone having the same problem?

• mitch895
Participant
• CFA Charterholder
4

Georgeâ€¦

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%

â€¦of course the other way to roughly guesstimate it is to jump straight to the holding period return then annualising itâ€¦ieâ€¦ [(\$45 + \$3 dividends)/(\$35)]^0.5 = 17.11%â€¦ 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
4

Actually in year two one holds two stocks: \$90 + \$3 / \$80 = 16.25%.

• exam_whiz
Participant
• Undecided
1

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
Participant
• Undecided
1

Boo! I got it wrong. :neutral_face: