George Lennon buys 250 shares of ABB on 1 January 2016 at a price of $256.30...

George Lennon buys 250 shares of ABB on 1 January 2016 at a price of $256.30 per share. A dividend of $5 per share is paid on 1 January 2017. Assume that this dividend is not reinvested. Also on 1 January 2017, Lennon sells 90 shares at a price of $275 per share. On 1 January 2018, he collects a dividend of $7 per share (on 160 shares) and sells his remaining 160 shares at $299 per share. Calculate the time-weighted rate of return on Lennon's portfolio (write the answer in decimals, not %).

I calculated it and got 23.71% (0.2371) as a result and it was wrong.

Hope someone can help me out

Solutions

Expert Solution

Calculating Holding period return for 2016

Beginning value of portfolio = No of shares bought on 1 Jan 2016 x price per share on 1 Jan 2016 = 250 x 256.30 = 64075

Ending value of portfolio = Value of shares at end of 2016 + Dividends received = No of shares bought on 1 Jan 2016 x price per share on 1 Jan 2017 + No of shares bought on 1 Jan 2016 x dividend per share received on 1 Jan 2017 = 250 x 275 + 250 x 5 = 68750 + 1250 = 70000

Holding period return for 2016 = (Beginning value of portfolio - Ending value of portfolio) / Ending value of portfolio = (70000 - 64075) / 64075 = 5925 / 64025 = 0.092469 = 9.2469%

Calculating Holding period return for 2017

Since 90 shares have sold, thus beginning share balance as on 1 Jan 2017 = 160

Beginning value of portfolio = No of shares remaining on 1 Jan 2017 x price per share on 1 Jan 2017 = 160 x 275 = 44000

Ending value of portfolio = Value of shares at end of 2017 + Dividends received = No of shares remaining on 1 Jan 2017 x price per share on 1 Jan 2018 + No of shares remaining on 1 Jan 2017 x dividend per share received on 1 Jan 2018 = 160 x 299 + 160 x 7 = 47840 + 1120 = 48960

Holding period return for 2017 = (Beginning value of portfolio - Ending value of portfolio) / Ending value of portfolio = (48960 - 44000) / 44000 = 4960 / 44000 = 0.112727 = 11.2727%

Calculating time weighted return

Time weighted return = (1 + Holding period return for 2016)(1 + Holding period return for 2017) - 1 = (1 + 9.2469%)(1+11.2727%) - 1 = 1.092469 x 1.112727 - 1 = 1.2156 - 1 = 0.2156

Time weighted return = 0.2156

jeff jeffy answered 8 months ago

Next > < Previous

Related Solutions

John Wilson buys 150 shares of ABM on 1 January 2012 at a price of $156.30...

John Wilson buys 150 shares of ABM on 1 January 2012 at a price of $156.30 per share. A dividend of $10 per share is paid on 1 January 2013. Assume that this dividend is not reinvested. Also on 1 January 2013, Wilson sells 100 shares at a price of $165 per share. On 1 January 2014, he collects a dividend of $15 per share (on 50 shares) and sells his remaining 50 shares at $170 per share. 1. Write...

1. John buys shares of stock in Acme Corp. on January 1, 2018 for $50. He...

1. John buys shares of stock in Acme Corp. on January 1, 2018 for $50. He gifts the stock to Mary on July 1, 2018 when the stock has a fair market value (fmv) of $60. Mary sells the stock on September 1 , 2018 for $80. a. What is the gain /loss recognized by John? ______________ What is the character of the gain/loss? _____________ b. What is the gain /loss recognized by Mary? ______________ What...

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...

An investor buys 100 shares in a mutual fund on January 1, 2012, for $60 each....

An investor buys 100 shares in a mutual fund on January 1, 2012, for $60 each. The fund earns dividends of $2.50 and $4 per share during 2012 and 2013. These are reinvested in the fund. Its realized capital gains in 2012 and 2013 are $4 per share and $5 per share, respectively. The investor sells the shares in the fund during 2014 for $70 per share. Explain how the investor is taxed.

On July 1, 2019, ABB Company, Inc. purchased 30% of the outstanding ordinary shares of ABC...

On July 1, 2019, ABB Company, Inc. purchased 30% of the outstanding ordinary shares of ABC Company for P5,160,000 cash, including transaction cost of P160,000. ABB Company gained ability to exercise influence over ABC Company as a result of this acquisition. On the date of acquisition, the fair value of ABC’s net assets was P12,400,000. ABB Company has determined that the excess of the cost of the investment over its share of ABC’s net assets is attributable to goodwill. ABC’s...

Sam buys 100 shares of Acme stock at $100 per share on January 1, Year 1....

Sam buys 100 shares of Acme stock at $100 per share on January 1, Year 1. At the end of the first year (December 31, Year 1), she buys 100 more shares at $120 per share. At the end of the second year (December 31, Year 2), she buys another 100 shares for $135 per share. The stock pays a dividend of $2.00 per share on December 29th of each year. Acme is trading at $169.80 as of December 31,...

The price of shares of ABC stock was $60 on January 1, 2018 $70 on January...

The price of shares of ABC stock was $60 on January 1, 2018 $70 on January 1, 2019; and $50 on January 1, 2020. Paul bought one share of ABC on January 1, 2018, four more on January 1, 2019, and sold all five shares on January 1, 2020. What is the annual arithmetic (time-weighted) average return on ABC stock during the two-year period? What is the annual geometric (time-weighted) average return on ABC stock during the two-year period? What...

On January 1, 2008 SSS buys 500 shares of Co common stock for $50/share for the...

On January 1, 2008 SSS buys 500 shares of Co common stock for $50/share for the stock portfolio as short-term investment. SSS’s purchase represents 1% of outstanding Co stock and the company exerts no influence on Co. Journalize the purchase by SSS. On February 1 Co pays a $1/share dividend. Journalize SSS’s receipt of the dividend. On Feb 15, Co reports $1mm net income. What JE does the company make, if any, to recognize the income? On March 1 SSS...

4. John buys shares of stock in Acme Corp. on January 1, 2018 for $50. John...

4. John buys shares of stock in Acme Corp. on January 1, 2018 for $50. John dies July 1, 2018 when the stock has a fmv of $60. Mary inherits the stock from John’s estate. Mary sells the stock on September 1, 2018 for $80. a. What is the gain /loss recognized by John’s estate? ______________ What is the character of the gain/loss? _____________ b. What is the gain /loss recognized by Mary? ______________ What...

Purnama Bhd acquired 45% of the ordinary shares of Bulan Bhd on 1 January 2016. The...

Purnama Bhd acquired 45% of the ordinary shares of Bulan Bhd on 1 January 2016. The remaining shares are held by Bintang Bhd and Matahari Bhd ,each holding 25% and 30% of the ordinary shares of Bulan Bhd respectively. Starting from 1 January 2016, it has been agreed that the key management of Purnama Bhd will direct the relevant activities of Bula Bhd which include approving any kind of transactions related to sales and purchases of goods as well as...

Subjects