Question

Today, you buy one share of stock costing $50. The stock pays a $2 dividend one year from now. Also one year from now, you purchase a second share of stock for $53. Two years from now you collect a $2 per share dividend and sell both shares of stock for $54 a share. What is your dollar-weighted return?

Answer 1

weighted return = 0.0781 = 7.81%

Step-by-step explanation:

Given data:

stock cost is $50

dividend on stock is $2

cost of new stock $53

share dividend cost from 2 year now = $2

total selling cost for both stock is $54

holding period return for 1st year

`HPR_1 = ((53 - 50) + 2)/(50) = 0.10 = 10`%

`HPR_2 =((53 - 50) + 2*2)/(2*53) = 0.0566 = 5.66`%

weighted return
`= [(1 +HPR_1) *(1 +HPR_2)]^(1/2) -1`

weighted return
`= [(1+ 0.10) *(1+0.0566)]^(1/2) -1`

weighted return = 0.0781 = 7.81%