Question

An investor buys a share of stock for $40 at time t = 0, buys another share of the same stock for $50 at t = 1, and sells both shares for $60 each at t = 2. The stock paid a dividend of $1 per share at t = 1 and at t = 2. The periodic money-weighted rate of return on the investment is closest to:

Answer 1

The periodic money-weighted rate of return on the investment is approximately 35.56%.

Step-by-step explanation:

The periodic money-weighted rate of return on the investment can be calculated by taking into account the purchase price, sale price, and any dividends received.

Step 1: Calculate the total cost of buying the shares by adding the purchase prices:

$40 + $50 = $90

Step 2: Calculate the total proceeds from selling the shares by multiplying the sale price by the number of shares:

$60 x 2 = $120

Step 3: Calculate the dividend received by multiplying the dividend amount by the number of shares:

$1 x 2 = $2

Step 4: Calculate the net return by subtracting the total cost from the total proceeds and adding the dividend:

$120 - $90 + $2 = $32

Step 5: Calculate the rate of return by dividing the net return by the total cost:

$32 / $90 = 0.3556

The periodic money-weighted rate of return on the investment is approximately 0.3556 or 35.56%.