Chartered Financial Analyst Level 1
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An investor gathers the following information about a stock:
- Stock price at t=0: $20
- Dividend paid at t=1: $3
- Stock price at t=1: $12
- Dividend paid at t=2: $1
- Stock price at t=2: $20
The investor purchased one unit of the stock at t=0 and sold it at t=2. If the dividends were not reinvested, the money-weighted rate of return is closest to:
An investor gathers the following information about a stock:
- Stock price at t=0: $20
- Dividend paid at t=1: $3
- Stock price at t=1: $12
- Dividend paid at t=2: $1
- Stock price at t=2: $20 The investor purchased one unit of the stock at t=0 and sold it at t=2. If the dividends were not reinvested, the money-weighted rate of return is closest to:
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Explanation:
Explanation:
The money-weighted rate of return (MWRR) is analogous to the internal rate of return (IRR) or yield to maturity. From the investor's perspective, cash outflows include the initial investment, while cash inflows consist of dividends received and the final sale proceeds. For this investment:
- Cash Flows:
- t=0: -$20 (initial investment)
- t=1: +$3 (dividend)
- t=2: +20 sale price + $1 dividend)
The equation for MWRR is: Solving for yields approximately 10.24%, which rounds to 10%.
Why Other Options Are Incorrect:
- Option B (15%): This represents the time-weighted rate of return (TWRR), which calculates returns based on holding period returns for each sub-period, not accounting for cash flows.
- Option C (20%): This incorrectly interprets the net cash flow as the return, ignoring the timing of cash flows, which is critical for MWRR calculations.