quantitative methods: value of stock-market investment

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dianharper
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quantitative methods: value of stock-market investment

Postby dianharper » Sun Jan 18, 2009 10:17 pm

1) Charlie has invested in the stock market. His investment goes down 30% for the first year in value; however, he does receive 1.0% in dividends. He now has an amount that is less than he started the year. Well he decides to leave his money in the same investments. Now this year his investments go up 30% He also receives the dividend which is about 1.1%. Charlie sells all of his stocks and places his money in the bank. For the buy and sell transactions he did not pay any commissions. Which is the correct answer?

a) Charlie made money
b) Charlie broke even
c) Charlie lost money
d) It is impossible to solve this problem
e) I have no earthly idea

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stapel_eliz
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Postby stapel_eliz » Sun Jan 18, 2009 10:53 pm

One way of doing this is to pick some starting amount. It doesn't matter what amount you choose, because you're dealing with percentages, and you only really care about the relative changes.

So start with, say, a hundred bucks. The exercise doesn't say, so you'll have to guess whether or not he received the dividends on the original value or the value after the loss. Suppose it's after the loss.

After he's lost 30%, how much does he have left?

What is 1% of this? So how much does he after after the dividend?

How much is 30% of this? So how much does he have after the gain?

What is 1.1% of this? So how much does he have after the dividend?

How does this last value compare with the original $100?

If you get stuck, please reply showing all of your work and reasoning. Thank you! :D

Eliz.


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