ch1_example1 - 172.1 Solution Year Real AOL Stock Price in...

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The first column of the following table describes the price movement of AOL corporation stock over the last 5 years. The second column gives the period's consumer price index. Calculate the real value of the stock for each time period using year 5 as the base year. If you purchased $1,000 worth of AOL Corporation in year 1, what has happened to the purchasing power of your original $1,000 investment when you sell the stock in year 5? Year AOL CPI 1996 $4.00 147.8 1997 $3.84 155.3 1998 $7.00 163.0 1999 $37.00 165.4 2000 $70.00
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Unformatted text preview: 172.1 Solution: Year Real AOL Stock Price in 2000 Dollars 1996 $4.66 1997 $4.26 1998 $7.39 1999 $38.50 2000 $70.00 The real value of a year 1996 dollar in 2000 is 172.1($1)/147.8 = $1.16. I would have bought 250 shares of AOL at 1996 prices (ignoring transaction costs) with the $1,000. The value of the stock in the year 2000 is (250(70))=$17,500. The change in my purchasing power is ($17,500 - $1,160)/$1,160 = 14.09. That is, my purchasing power from investing in the stock rises by 1,409%....
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This note was uploaded on 04/29/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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