# 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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