Question

Mat Holdings buys 150 shares of SOL on 1 January 2017 at a price of $112.94 per share. A dividend of $15 per share is paid on 31 December 2017. Assume that this dividend is not reinvested. On 1 January 2018, the company sells 90 shares at a price of $134.50 per share. On 31 December 2018, the company receives a dividend of $15 per share and sells all remaining shares at $145 per share. (Show all workings including time lines)

i.) Compute the money-weighted rate of return. [4]

ii.) Compute the time-weighted rate of return on the portfolio [4]

iii.) Describe a set of circumstances for which the money-weighted rate of return is an appropriate return measure for Mat Holdings’ portfolio. [1]

iv.) Describe a set of circumstances for which the time-weighted rate of return is an appropriate return measure for Mat Holdings’ portfolio.

Answer 1

Let the market value (M.V.) of each share be x.

The dividend is calculated on nominal value.

The dividend on one share = 10% of $ 50 = $ 5.

Therefore, he earned $ 5 on an investment of x.

A profit of 16 % on x = 16

100

16100 × x = 4x

25

4x25

Therefore, 4x

25

4x25 = $ 5

⟹ x = $25×5

4

25×54

⟹ x = $125

4

1254

⟹ x = $ 31.25