Sign up  |  Log in

Money- Weighted Return

An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end
of year two she sells all four shares for $98 each. The stock paid a dividend of $1.00 per share at the end of year one and
year two. What is the investor’s moneyweighted
rate of return?
5.29%.
0.06%.
6.35%.

✗ A)
✗ B)
✓ C)

Explanation
T = 1: Dividend from first share = +$1.00
Purchase of 3 more shares = $
267.00
T = 2: Dividend from four shares = +4.00
Proceeds from selling shares = +$392.00
The moneyweighted
return is the rate that solves the equation:
$100.00 = $
266.00 / (1 + r) + 396.00 / (1 + r) .
CFO = 100;
CF1 = 266;
CF2 = 396; CPT → IRR = 6.35%.

Shouldn’t CF1 be 264 instead of 266 seeing it’s $1 dividend / share?

Make the most of your CFA exam prep in one weekend! Join renowned instructors, Peter Olinto, Darren Degraaf & David Hetherington in May for a live, two-day CFA intensive final review class.

CF_0 = ($100), because we bought one share, so it’s a cash outflow

CF_1 = ($89) x 3 + $1 x 1 = ($266), because we bought three shares and received dividends on the share that we purchased in CF_0.  You don’t get dividends on shares if those dividends are distributed on the day you purchase them.

CF_2 = $98 x 4 + $1 x 4 = $396, because we sold 4 shares and received dividends on each of them