Suppose you purchase one share of the stock of VM Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The time-weighted return on your investment is
A) −1.75%.
B) 4.08%.
C) 6.74%.
D) 11.46%.
E) 12.35%.

Question

Quizplus · Accepted Answer

The time-weighted return is calculated by finding the geometric mean of the returns for each period. Year 1 return: (($30 + $2) / $36) - 1 = -11.11%. Year 2 return: (($36.45 + $2) / $30) - 1 = 27.5%. Time-weighted return = [(1 - 0.1111) * (1 + 0.275)]^(1/2) - 1 = 6.74%.

Suppose You Purchase One Share of the Stock of VM