Fin630 GDB solution
Wednesday, January 12, 2011 Posted In Fin Edit ThisFin630 GDB
Last Date: 14 Jan 2011:
Mr. Salman has a diversified portfolio of bonds and stocks. He has sold two stocks from portfolio.
1. Stock A which was purchased 8 months ago for Rs. 580 has paid Rs. 15 dividend and currently selling at Rs. 600.
1. Stock A which was purchased 8 months ago for Rs. 580 has paid Rs. 15 dividend and currently selling at Rs. 600.
2. Stock B which was purchased 6 months ago for Rs. 450 has paid Rs. 12 dividend and currently selling at Rs. 465.
You are required to help Mr. Salman in analyzing which stock has given more return.
Required: 1. Calculate holding period return of stock A 2. Calculate holding period return of stock B 3.Calculate the annual return on both stocks 4. On which stock (A or B) return is greater?
SOLUTION
Holding Period Return = Income + [ End of Period Value – Initial Value]
Initial Value
Holding period return of Stock A = 6.034%
Holding period return of Stock B = 6.00 %
Annual Return for both stocks:
Stock A = 5.034%
Stock B = 5.00 %
Stock With Greater Return = Stock A
..................
Holding Period Return of stock A = 6.034%
Holding Period Return of stock B = 6%
Annual Return on stock A = 9.063% Annual Return on stock B = 12.10%
Annual Return on stock B (12.10%) is greater then stock A (9.063%)
Requirement No. 1
Holding Period Return of stock A = Ending value – Begging Value + Income / Begging Value
= 600 – 580 + 15 / 580
= 35 / 580
= .06034 * 100
= 6.034%
Requirement No. 2
Holding Period Return of stock B = Ending Value – Begging Value + Income / Begging Value
= 465 – 450 +12 / 450
= .06
= .06 * 100
= 6%
Requirement No. 3
Annual Return on stock A = 6.034% * (365/243)
= 9.063%
Annual Return on stock B = 6% * (365/181)
= 12.10%
Note: 243 days is sum of first 8 months and 181 days is sum of first six months
Requirement No. 4
Annual Return on stock B (12.10%) is greater then stock A (9.063%)
SOLUTION
Holding Period Return = Income + [ End of Period Value – Initial Value]
Initial Value
Holding period return of Stock A = 6.034%
Holding period return of Stock B = 6.00 %
Annual Return for both stocks:
Stock A = 5.034%
Stock B = 5.00 %
Stock With Greater Return = Stock A
..................
Holding Period Return of stock A = 6.034%
Holding Period Return of stock B = 6%
Annual Return on stock A = 9.063% Annual Return on stock B = 12.10%
Annual Return on stock B (12.10%) is greater then stock A (9.063%)
Requirement No. 1
Holding Period Return of stock A = Ending value – Begging Value + Income / Begging Value
= 600 – 580 + 15 / 580
= 35 / 580
= .06034 * 100
= 6.034%
Requirement No. 2
Holding Period Return of stock B = Ending Value – Begging Value + Income / Begging Value
= 465 – 450 +12 / 450
= .06
= .06 * 100
= 6%
Requirement No. 3
Annual Return on stock A = 6.034% * (365/243)
= 9.063%
Annual Return on stock B = 6% * (365/181)
= 12.10%
Note: 243 days is sum of first 8 months and 181 days is sum of first six months
Requirement No. 4
Annual Return on stock B (12.10%) is greater then stock A (9.063%)
