Question

You just sold your stocks at $41.80 per share. You did not receive any dividends since you purchased them at $$35 per share two years ago. What is your effective annual return?

1. 10.31%

2. 7.52%

3. 9.28%

4. 19.43%

Answer 1

First we need to find out the nominal rate of return in order to find out the effective rate of return which will take into effect, the compounding rate of interest.

Nominal rate of return=( (selling price - buying price)/buying price)

=(( 41.80-35)/35)× 100

= (6.80/35)×100

= 19.43%

Since it is the nominal rate of return for 2 years, we will try to calculate effective rate of return.

it would be taken into account the compounding effect associated with the rate of return and then it will be taken for 2 years.

So, the effective rate of return would be-

= 19.43% for two years, then the effective rate of return would be 9.28%.

Hence the correct answer is option( C) 9.28%