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Assume an investor buys 5 shares of Stock A on January 1 2015 for $80 per...

Assume an investor buys 5 shares of Stock A on January 1 2015 for $80 per share. During the year the stock paid $2 in dividends per share. On Jan 1, 2016, the investor purchases another 8 shares at $84. During the year the stock paid another $2 dividend. On Jan 1, 2017, the investor sells 3 shares for $85, but collects the same $2 in dividends throughout 2017 on the remaining shares. Finally on Jan. 1, 2018 the investor sells all of his shares for $90. What is the geometric rate of return? Round all intermediate calculations to 4 decimals points (0.XXXX), convert answer into percentages with two decimal places, do not use the % sign.

Solutions

Expert Solution

Return from 2015 to 2016 =(Price next year -Price current Year + Dividend)/Price Current year
=(84-80+2)/80=7.5%
Return from 2016 to 2017 =(Price next year -Price current Year + Dividend)/Price Current year
=(85-84+2)/84=3.5714%
Return from 2017 to 2018 =(Price next year -Price current Year + Dividend)/Price Current year
=(90-85+2)/85=8.2353%
Geometric return of return =((1+7.5%)*(1+3.5714%)*(1+8.2353%))^(1/3)-1 =6.42%

jeff jeffy answered 2 years ago
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