1.Rates of return: Arithmetic, Geometric and Dollar-weighted (IRR)

The stock prices and dividends of XTC are as follows:

2016: Beginning of Year Price: $50 / Dividend Paid at Year End: $2

2017: Beginning of Year Price: $65 / Dividend Paid at Year End: $2

2018: Beginning of Year Price: $40 / Dividend Paid at Year End: $2

2019: Beginning of Year Price: $50 / Dividend Paid at Year End: N/A

An investor buys 10 shares at the beginning of 2016, buys another 5 shares at the beginning of 2017, sells 7 shares at the beginning of 2018, and sells the remaining 8 shares at the beginning of 2019.

A.Solve for holding period return for each year. The holding period return is calculated as (Ending Price - Beginning Price + Dividend) / (Beginning Price). For 2016, for example, assume the Ending Price for 2016 is the Beginning-of-Year Price for 2017.

B.Using the 3 HPRs you just calculated in part A, calculate the arithmetic average annual return.

C.Using the same HPRs, calculate the geometric average annual return.

D.Calculate the dollar-weighted return, which is the IRR (Internal Rate of Return). Calculate the cash inflow or outflow for each of the four dates. For example, your first cashflow would be a $500 cash outflow, since you bought 10 shares at $50 each. Shares that you sell, and dividends you receive, are cash inflows. Calculate the four cashflows and use your calculator or Excel to compute the IRR. Explain why your IRR is different from your answers to B and C.