Question 1
Multiple ChoiceIf you invest in the market right before the market returns skyrocket, which return will be elevated in favorable performance?
Explanation
Question 2
Multiple ChoiceJohn buys one share of ABC stock for $350. At the end of year one John decides to buy seven more shares at $420 per share. At the end of year two he sells all of the shares he purchased for $545 each. The stock paid an annual dividend at the end of each year of $10 a share. Please calculate John's money-weighted return.
Explanation
Question 3
Multiple ChoiceAn investor buys one share of stock for $200. At the end of year one she buys two more shares at $180 per share. At the end of year two she sells all three shares for $190 each. The stock paid a dividend of $2.00 per share at the end of year one and year two. What is the investor's time-weighted rate of return?
Explanation
Question 4
True FalseTime-weighted returns are affected by the timing of cash flows.
Explanation
Question 5
Multiple ChoiceAn investor purchases two shares of stock at $75 each. At the end of year one, the stock pays a dividend of $1.50 per share, and the investor purchases two more shares at $82 each. At the end of year two, the investor sells all four shares at $80 per share. Each share pays another dividend of $1.50 at the end of year two. What is the investor’s money-weighted rate of return?
Explanation
The cash flows are as follows:
T = 0: Buy 2 shares at $75 = −$150
T = 1: Receive $3 in dividends; buy 2 shares at $82 = −$164 + $3 = −$161
T = 2: Receive $6 in dividends; sell 4 shares at $80 = 4 × $80 + $6 = $320 + $6 = $326
Use a financial calculator or spreadsheet to compute IRR with:
CF0 = –150
CF1 = –161
CF2 = +326
IRR ≈ 3.22%, which is the money-weighted rate of return accounting for all inflows and outflows.
Step-by-Step on the BA II Plus
1. Enter Cash Flow Mode
Press: CF
You should see CFo=
2. Enter the Cash Flows
CFo = -150
(Initial investment at T = 0)
Press: 150, then +/−, then ENTER
Press: ↓C01 = -161
(Dividend of +3 and purchase of 2 shares at $82 → Net = –161)
Press: 161, then +/−, then ENTER
Press: ↓
Frequency F01 = 1 → Press ENTER, then ↓C02 = 326
(Dividend of 4 shares + sale of 4 shares = 6 + 320)
Press: 326, then ENTER
Press: ↓
Frequency F02 = 1 → Press ENTER, then ↓
3. Compute IRR
Press: IRR
Then press: CPT
You should get: IRR ≈ 3.22%
Question 6
Multiple ChoiceAn analyst is evaluating a client’s investment portfolio over a two-year period. She calculates the internal rate of return (IRR) based on all deposits and withdrawals made during the period, along with the ending market value. The return she is calculating is best described as the:
Explanation
The money-weighted rate of return is calculated using the internal rate of return (IRR) method, which incorporates the timing and amount of all external cash flows, such as deposits and withdrawals. It equates the present value of all cash inflows with the present value of all cash outflows, making it sensitive to the timing of those flows.