weighted return

Question

You purchase a stock for $100 that pays an annual dividend of $5.50.  At the beginning of the second year, you purchase an additional share for $130.  At the end of the second year, you sell both shares for $140.  Determine the dollar weighted return and the time weighted compounded (ie, geometric) return on this investment.  Repeat the process but assume that the second share was purchased for $110 instead of $130.  Why do the rates of return differ?

Answer 1

 

The "rates" (IRR or Internal Rate of Return) differ as a result of the cost (price) change from $130 to $110.. and, without calculating rates, each scenario is a loss to the investor (negative IRR).

 

1. -28% =IRR(-100,-130,145.5)

 

2. -22% =IRR(-100,-110,145.5)