Question

Financial question compost of 3 parts:

1. Matthews bought 100 Wells Fargo shares for $4/share and received $0.4/share during the time, what is his rate of return for his investment in wells Fargo shares if he sold his shares for $5/share?
2. Matthews bought 100 capital one bank shares for $3/share and received $0.3/share during the time, what is his rate of return for his investment in capital one bank shares if he sold his shares for $3.6/share?
3. Assuming that Matthews portfolio of investment is made up of 45% of wells Fargo shares and 55% of capital shares what is his expected return for the investment in questions 1 and 2 above?

Please, explain how you did the calculations. Thank you!

Answer 1

Rate of return = Holding period return = (P1+D1-P0)/P0

where P0 = purchase price , D1 = dividend, P1 = sale price

now

First case :

P0 = 100 x 4 = 400  

D1 = 100 x 0.4 = 40

P1 = 100 x 5 = 500

Rate of return = (500+40 -400)/400 = 35%

Second case :

P0 = 100 x 3 = 300  

D1 = 100 x 0.3 = 30

P1 = 100 x 3.6 = 360

Rate of return = (360+30 -300)/300 = 30%

Third case :

we have to find here portfolio return

Portfolio return = sum (weight x return)

weight of wells fargo = 45% and return = 35% [ as calculated above]

weight of capital = 55% and return = [ as calculated above]

Portfolio return = (45% x 35%) + (55% x 30%) = 32.25% [Thumbs up please]