Suppose that you invested $10,000 dollars using the dollar-cost-averaging approa
ID: 2619759 • Letter: S
Question
Suppose that you invested $10,000 dollars using the dollar-cost-averaging approach. Assume that on Feb-1-10, and on Feb-1-11, you purchased $5,000 worth of stock (each year). You then held the shares until they were sold on Feb-1-2014 (assume you received the dividend in all these years and dividends were reinvested). What is the ROI on your investment over the holding period (4 years)? _______________ Hint: create a spreadsheet of your cash flows and solve for the IRR. Note: you only get the $1.20 dividend in 2011 on the shares purchased in 2010. Assume that you get the $1.70 dividend on shares purchased in 2014 just before you sold those shares.
ENTER ANSWER as a Whole Number (i.e. 10.2% entered as 10.2)
Explanation / Answer
It is given that we have invested $ 5000 each year on 1-feb-10 and on 1-feb-11
It means that shares purchased on 1-feb-10 received all the dividends i.e. 1.2 + 1.4 + 1.5 + 1.7 = $ 5.8 whereas shares purchased on 1-feb-11 received only last 3 dividends i.e. 1.4+1.5+1.7 = $ 4.6
Now let us find the number of shares purchased on both the dates mentioned above,
No. of shares purchased on 1-feb-10 = 5000/135 = approx 37 shares
No. of shares purchased on 1-feb-11 = 5000/140 = approx 36 shares
Both these shares were sold on 1-feb-14 when the price of each share was $ 165
So return on shares purchased = ((Current Value of Shares + Dividends Received - Cost of Reinvestment) - Original Cash Investment)
Total return on shares purchased on both the dates using the above mentioned formula = [(165+5.8-0-135)]*37 + [(165+4.6-0-140)]*36 = $ 2390.2
Return on Investment (ROI) = return as calculated above / amount invested * 100
ROI = 2390.2 / 10,000 * 100
ROI = 23.902%
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