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:

23.0%

22.2%

23.8%

Answer 1

Money Weighted rate of return is the return where weights are given according to the amount of money invested at periods. It can be calculated as IRR.

As per given information in the question

Year End	T0	T1	T2
Share purchase	-40	-50	120	Sale
+Dividend		1	2
Cash Flow	-40	49	122

Equate PV of cash inflow with PV of cash outflow to calculate IRR. Need to use hitand trial or trial and error method.

Calculate NPV at 20%

NPV = 3.89

Calculate NPV at 25%

=

= - 1.12

Do Interpolation:

You will get 23.88% which Near to 23.8% i.e. Option 3.