Valuing Investments

XYZ stock price and dividend history are as follows:Year     Beginning-of-Year Price Dividend Paid at Year-End

2010     $           124       $ 4

2011     $           135       $ 4

2012     $           115       $ 4

2013     $           120       $ 4

 

 

An investor buys six shares of XYZ at the beginning of 2010, buys another two shares at the beginning of 2011, sells one share at the beginning of 2012, and sells all seven remaining shares at the beginning of 2013.

 

a.      What are the arithmetic and geometric average time-weighted rates of return for the investor? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Year                                  Return=(capital gains+dividend)/Price

2010-2011:                     (135-124+4)/124=0.123

2011-2012:                      (115-135+4)/135=-0.119

2012-2013:                      (120-115+4)/120=0.078

Arithmetic= [0.123+ (-0.119)+0.078)]/3=0.0273=2.73%

Geometric=

Solution: