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

    • mitch895
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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
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      Actually in year two one holds two stocks: $90 + $3 / $80 = 16.25%.

    • exam_whiz
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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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