02 - Question and Problem Answers Chapter 2-Measuring...

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A . R $2,124,770. $2,000,000. 1.062385 r 6.2385% B . R $1,843,748. $2,000,000. 0.921874 r 7.8126% C . R $2,000,000. $2,000,000. 1.0000 r 0.0000% R $34,993,897.09 15 31 ($3,098.10) 21 31 ( $9,879.20) 31 31 ($3,098.10) $34,978,567.03 16 31 ($3,098.10) 10 31 ( $9,879.20) 0 31 ($3,098.10) $34,995,992.27 $34,976,979.21 1.000543588 r 0.05436% R $34,993,897.09 1 2 ( $3,683.00) $34,978,567.03 1 2 ( $3,683.00) $34,995,738.59 $34,976,725.53 1.000543592 r 0.05436% Question and Problem Answers page 1 Chapter 2-Measuring Portfolio Return ± 2 - 1: ± 2 - 2: A. The pension payments and contribution are not part of the decrease or increase in the value of the portfolio that we need to measure, so we subtract them out. Dividends and bond income are received as a result of the way in which the portfolio was invested; they stay in. B. The total cash flow to be taken out is -$3,683.00 so, using the mid-month cash flow adjustment we get The rate of return is identical to the seventh decimal place - fifth decimal place in percentage points. When the cash flows are distributed through the month in this way then the mid-month method is a pretty good estimate.
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2F INANCIAL MARKETS . .. AND THE INSTRUMENTS THAT TRADE IN THEM $56,750. $300. $57,000. 1.000877 1 0.0877% or $56.750. $0.30 $57. 1.000877 1 0.0877% E [ R ] 12.0% 8.0357143% 3. 3% 3 16.70238095% 3 5.56746% ± 2 - 3: A. Dividends are not cash flow in the rate of return calculation because the dividend is the result of the investment made not a flow out of the investor's control. B. The portfolio begins with $57,000. (1,000 shares * $57.000) and ends with $57,050. ($56,750. in shares and $300 in cash (1,000 shares * 30¢ per share dividend). Thus the rate of return is 8.77% ± 2 - 4: A. January : R $28 $25 1.120 1 12.0% February : R $30 $0.25 $28 1.080357143 1 8.036% March : R $29.25 $30.25 0.966942149 1 3.305% Note that for the month of March we take a portfolio approach and measure the rate of return on the portfolio value of $29.25. The 25¢ dividend we have sitting in idle cash thus increases the portfolio return to -3.305%: the $29 earns a return of -3.333% and the 25¢ earns a return of 0%.
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This note was uploaded on 08/25/2009 for the course FIN 300 taught by Professor Jackson during the Spring '07 term at University of Illinois at Urbana–Champaign.

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02 - Question and Problem Answers Chapter 2-Measuring...

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