Question

1. Buffett purchased Berkshire Hathaway stock at $13 a share in 1965. By 2005, BRK stock was trading at $140,000 a share. What is the geometric return for Buffett’s investment in 40 years

2. From 2002 to 2006, PBR stock has annual return of 25%, 18%, 22% 28% and 45%. What is the arithmetic average return, geometric return and variance?

3. A typical non-bank money transfer (such as MoneyGram) cost $15. If you were to transfer $150 to someone who needs those money in a different city every two weeks, what is the EAR for the transfer? What if you do it once a day?

Answer 1

1)	Geometric return = (140000/13)^(1/40)-1 =				26.13%
2)	Year	Return %	d = r - Avg. r	d^2
	2002	25	-2.6	6.76
	2003	18	-9.6	92.16
	2004	22	-5.6	31.36
	2005	28	0.4	0.16
	2006	45	17.4	302.76
		138		433.20
	Average return = 138/5 =				27.60%
	Geometric return = (1.25*1.18*1.22*1.28*1.45)^(1/5)-1 =				27.28%
	Variance = (433.20/5) =				86.64%
3)	% fee = 15/150 = 10%.
	EAR, if transfer is once every two weeks = 1.1^26-1 =				1091.82%
	EAR, if transfer is once a day = 1.1^365-1 =				128330558031338000.00%