Asked by Nadia Kovacs on Jul 12, 2024
Verified
Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the stock will be ________ your time-weighted return on the stock.
A) higher than
B) the same as
C) less than
D) exactly proportional to
E) More information is necessary to answer this question.
Dollar-Weighted Return
A method of calculating an investment's return that takes into account the timing and amount of cash flows into and out of the investment.
Time-Weighted Return
A method to measure the compound rate of growth in a portfolio, eliminating the effect of cash flows in and out of the portfolio.
- Identify the impact of investing timing and method (dollar-weighted vs. time-weighted return) on overall investment performance.
Verified Answer
YZ
Yihao ZhangJul 19, 2024
Final Answer :
A
Explanation :
In the dollar-weighted return, the stock's performance in the second year, when 200 shares are held, has a greater influence on the overall dollar-weighted return. The time-weighted return ignores the number of shares held.
Learning Objectives
- Identify the impact of investing timing and method (dollar-weighted vs. time-weighted return) on overall investment performance.