Assume an investor makes the following investments:
During year one, the stock paid a $5.00 per share dividend. In year two, the stock paid a $7.50 per share dividend.
The time-weighted return is:
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A. B. C. D.A
To calculate the time-weighted return:
Step 1: Separate the time periods into holding periods and calculate the return over that period:
Holding period 1:P0= $50.00 -
D1= $5.00 -
P1= $75.00 (from information on second stock purchase)
HPR1 = (75 "" 50 + 5) / 50 = 0.60, or 60%
Holding period 2:P1= $75.00 -
D2= $7.50 -
P2= $100.00 -
HPR2 = (100 "" 75 + 7.50) / 75 = 0.433, or 43.3%.
Step 2: Use the geometric mean to calculate the return over both periods
Return = [(1 + HPR1) * (1 + HPR2)]1/2"" 1 = [(1.60) * (1.433)]1/2"" 1 = .5142, or51.4%.