Question

2.  Suppose that you purchase 100 shares of GM stock at the beginning of year 1, and...

2.  Suppose that you purchase 100 shares of GM stock at the beginning of year 1, and purchase another 100 shares at the end of year 1.
You sell all 200 shares at the end of year 2.  Assume that the price of GM was $50 at the beginning of year 1, $55 at the end of year 1
and $66 at the end of year 2.
What is the arithmetic mean time-weighted return?  What is geometric mean time-weighted return?
What is the dollar weighted return?  
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Homework Answers

Answer #1

a. Rate of Return year 1 =(Ending Price-Beginning Price+)/Beginning Price =(55-50)/50 =10%
Rate of Return from Year 2 =(Ending Price-Beginning Price)/Beginning Price =(66-55)/55 =20%

Arithmatic average rate of return =(10%+20%)/2 =15%
Geometric rate of return =((1+10%)*(1+20%)^(1/2)-1 =14.89%

b. Cash Flow in Year 0  =-100*50=-5000 (Purchase of 100 shares)
Cash flow in year 1 =-100*55=-5500 (Purchase of 100 shares)
Cash Flow in Year 2 =200*66 =13200(Sale of 200 shares)


Dollar Weighted Return using financial Calculator
CF0=-5000;CF1 =-5500;CF2=13200; CPT IRR =16.54%

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