Investments.

May 31st, 2016
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7. You sold a security for $980 that you purchased five years before for $795. What was the holding period return? Prove that this return overstates the annualized, compound return. The holding period return is ($980-795)/$795 = 23.3%. Some methods to prove that the annualized return is not 23.3% are: Using an interest table…

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Investments1JKInstructor Charles BensonInvestmentsNovember 22, 2015InvestmentsInvestments27. You sold a security for $980 that you purchased five years before for $795. What was theholding period return? Prove that this return overstates the annualized, compound return.The holding period return is ($980-795)/$795 = 23.3%.Some methods to prove that the annualized return is not 23.3% are:Using an interest tableThe true annualized return is$795(1 + r) 5 = $980(1 + r) 5 = 980/795 = 1.2331.233 is the interest factor for the future value of $1 for five years; the interest factor 1.233produces a return of between 4 and 5 percent.And another method is to use a financial calculator:PV = -795; FV = 980; N = 5, PMT = 0; I =? = 4.27.11. A stock costs $80 and pays a $4 dividend each year for three years.a) If an investor buys the stock for $80 and expects to sell it for $100 after three years, whatis the anticipated annual rate of return?Dividend = 4 x 3 = 12Capital gain = 100-80 = 20Total return for three years = 12+20 = 32Total return for three years = 32/80 =40%Average return per year = 40/3 = 13.33%b) What would be the rate of return if the purchase price were $60?32+20/60 = 86.67%Annual return 86.67/3 = 28.89%c) What would be the rate of return if the dividend were $1 annually and the purchaseprice were $80 and the sale price were $100?Investments3Dividend = 1 x 3 = 3Capital gain = 100-80 = 20Total return for three years = 3+20 = 23

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