Question

You have a ​$105,000 portfolio comprising 13 stocks. You trade each stock five times this year...

You have a ​$105,000 portfolio comprising 13 stocks. You trade each stock five times this year and each time you​ trade, you pay about ​$35 in commissions and spread. You have no special​ knowledge, so you earn only the average market return of 12​% on your investments. How much lower will your total return be because of your​ trades?

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Answer #1

Calculation for Reduction in Total Returns because of trades :

i) Total Cost incurred for trading the stock :

Total Cost = Number of Stock traded*Number of times*commission paid per stock = 13 stocks * 5times * $35 per stock = $2275

ii) Market Value of Portfolio :

Market Value of Portfolio = Portfolio Amount * (1+ Rate of Return on Investment) = $105000 * (1+0.12) = $117600

Reduction in Total Returns because of trades :

Reduction in Returns =( Total Cost Incurred/Market value of Portfolio)*100 = ($2275/$117600)*100 = 0.19345%

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