Dollar-Weighted Rate of Return Calculation

Dollar-Weighted Rate of Return

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Question

Assume the following series of transactions:

t0: Purchase 150 Intelligent Semiconductor common stock at $90.60 per share t1: Receive a $4.45 per share dividend on 150 shares t1: Purchase an additional 100 shares at $100 per share t2: Receive $4.50 per share dividend on 250 shares t2: Purchase an additional 50 shares at $105 per share t3: Receive a $4.55 per share dividend on 300 shares t3: Sell 300 shares for $107.84 per share

Assuming no taxes or commissions and that each dividend was not reinvested, what is the dollar-weighted rate of return for this series of transactions?

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Explanations

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A. B. C. D. E. F.

C

Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. Further, the dollar-weighted rate of return is simply another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. The reason behind this classification is the fact that the IRR equation takes into account both the timing and scope of all project cash flows. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. This process is illustrated as follows: t0: -[150 shares purchased * $90.60 per share] = [$13,590] t1: -[100 shares purchased * $100 per share] + [$4.45 per share dividend * 150 shares] = [$9,332.50] t2: -[50 shares purchased * $105 per share] + [$4.50 per share dividend * 250 shares]} = [$4,125] t3: [300 shares sold * $107.84 per share] + [$4.55 per dividend * 300 shares] = $33,717

Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar- weighted rate of return of 9.73% for this investment.

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