Quantitative Methods - Quantitative Methods Section 1
- Option : A
- Explanation : Money-weighted rate of return is the internal rate of return (IRR) of the cash flows resulting from the investment activity. To calculate the money weighted rate of return for the investor, using financial calculator enter the following cash flows: CF0 = (-53 x 2) = - 106, CF1 = 6, CF2 = 6, CF3 = 6, CF4= 6 + (45 * 2) = 96, Compute IRR: IRR = 1.998% ~ 2.0%.
18. The table below shows information about a common stock:
| Date | Amount € | |
| Stock purchase (1 share) | 1 July 2012 | 54.00 |
| Stock purchase (1 share) | 1 July 2013 | 49.00 |
| Stock sale (2 shares @ 61.00 per share) | 1 July 2014 | 122.00 |
The stock does not pay a dividend. The money-weighted rate of return on the investment is closest to:
- Option : A
- Explanation : The money-weighted rate of return is the IRR based on the cash flows related to the investment. In this case, a cash outflow of €54 occurs at t = 0, another outflow of €49 occurs at t = 1, and an inflow of €122 occurs at t = 2. Using a financial calculator, the IRR of these cash flows is 11.64%.
- Option : B
- Explanation : The money-weighted rate of return is the internal rate of return (IRR) of the cash flows associated with the investment. Using a financial calculator, compute IRR. CF0 = – 44, CF1 = 4, CF2 = 5, CF3 = 49.50, CPT IRR. IRR = 10.87%.
20. An investor purchases 100 shares of a stock. The history of this investment is outlined below:
| Time | Activity | Price per Share ($) | Dividend per Share ($) |
| Begining of Year 1 | Buy 100 shares | 20.00 | |
| End of Year 1 | Buy 20 shares | 22.00 | 2.00 |
| End of Year 2 | 25.00 | 2.50 | |
| End of Year 3 | Sell 120 shares | 24.00 |
Assuming that the investor does not reinvest his dividends, which are tax-free,
the time-weighted rate of return on the investment is
closest to:
- Option : A
- Explanation : The time-weighted rate of return measures the compound growth rate of $1 initially invested in the portfolio over a stated measurement period. TWR = 3√{[(22 + 2)/20] * [(25 + 2.5)/22] * [(24/25)]} – 1 = 0.1292.
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