Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e. ,$1 for each share),and sell the shares for $67.20 each.The dollar-weighted return on your investment is _________.

Question

Quizplus · Accepted Answer

To find the dollar-weighted return on investment, we need to calculate the internal rate of return (IRR) on cash flows. Here are the cash flows for this investment:

- Year 0: -$50 (initial investment)
- Year 1: +$1 (dividend received) -$72 (purchase of second share)
- Year 2: +$2 (dividends received) +$134.40 (proceeds from sale of two shares)

To calculate the IRR, we can use a financial calculator or spreadsheet software. The IRR turns out to be 8.78%, which is the dollar-weighted return on investment.

Therefore, the correct answer is B.

Suppose You Purchase One Share of the Stock of Cereal