Time Weighted return and dividend reinvestment

CFA Level I Quant
#1

Hi everyone,

When using the time weighted return method, would a dividend reinvestment affect the second year period beginning balance? For example, if a t=0 I purchase a stock at $100, at the end of the year I get a $2 dividend and purchase another stock for $105. At the end of year 2, I sell both stock for $110 and get $2 per stock.

Time weighted return without reinvestment = 6.83%

105 + 2 -100/100 = 7%

220 + 4 - 210/ 210 = 6.67%

(1.07 * 1.0667)^0.5 = 6.83%

Time weighted return with reinvestment: 6.33%

105 + 2 -100/100 = 7%

220 + 4 -212/212 = 5.66%

(1.07 * 1.0566)^0.5 = 6.33%

Would a dividend reinvestment increase the period beginning balance in period as in scenario 2?

Thank you for your time!

#2

Your first method would be correct. Dividend reinvestment would not increase the beginning period balance.

#3

Thanks, this is what I thought. I guess the dividend is used as part of the purchase price of the second stock so there is no difference.

#4

cfageist, you violate CFA ethics by using your nick ))

#5

lol I do not think I do, if it was ‘‘CFA’’ then I would. But I am using cfa.