Question

Stock	`Shares (N)	Price (P)
A	100 K	$50
B	200 K	$30
C	500 K	$10

1. If you replace Stock B with 200,000 shares of Stock D at $20 and 100,000 shares of Stock E at $10, what is the portfolio turnover rate?
2. If you replace Stock B with 200,000 shares of Stock D at $10 and 100,000 shares of Stock E at $40, what is the portfolio turnover rate?

Answer 1

Part a)

The portfolio turnover rate is determined as below:

Portfolio Turnover Rate = (Value of Stocks Sold/Replaced or Value of Stocks Bought whichever is Less)/Total Value of Assets

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Here, Value of Stocks Bought = 200,000*20 (Stock D) + 100,000*10 ( Stock E) = $5,000,000 and Value of Stocks Sold/Replaced = 200,000*30 (Stock B) = $6,000,000

Therefore, we will take value of stocks bought (which is $5,000,000) as the numerator.

Total Value of Assets = 100,000*50 + 200,000*30 + 500,000*10 = $16,000,000

Using these values in the above formula, we get,

Portfolio Turnover Rate = 5,000,000/16,000,000 = 31.25%

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Part b)

The portfolio turnover rate is calculated as follows:

Portfolio Turnover Rate = (Value of Stocks Sold/Replaced or Value of Stocks Bought whichever is Less)/Total Value of Assets

______

Here, Value of Stocks Bought = 200,000*10 (Stock D) + 100,000*40 ( Stock E) = $6,000,000 and Value of Stocks Sold/Replaced = 200,000*30 (Stock B) = $6,000,000

Since, the value of stocks sold/replaced is same as the value of stocks bought, we will take $6,000,000 as the numerator.

Total Value of Assets = 100,000*50 + 200,000*30 + 500,000*10 = $16,000,000

Using these values in the above formula, we get,

Portfolio Turnover Rate = 6,000,000/16,000,000 = 37.50%