Question

Suppose you purchased ABC stock 4 month ago and your purchasing price was $40. The ABC stock price went up and down in the past 4 months: $50, $38, $42, and $49. Assume monthly risk free rate is 2%. Please calculate the following monthly figures:

E(R)=?

Answer 1

Compute the return of first month using the equation as shown below:

Return = (Closing price / Opening price) – 1

            = $50 / $40 – 1

            = 25%

Hence, the return of the first month is 25%.

Compute the return of second month using the equation as shown below:

Return = (Closing price / Opening price) – 1

            = $38 / $50 – 1

            = -24%

Hence, the return of the second month is -24%.

Compute the return of third month using the equation as shown below:

Return = (Closing price / Opening price) – 1

            = $42 / $38 – 1

            = 10.52631579%

Hence, the return of the third month is 10.52631579%.

Compute the return of fourth month using the equation as shown below:

Return = (Closing price / Opening price) – 1

            = $49 / $42 – 1

            = 16.66666667%

Hence, the return of the second month is 16.66666667%.

Compute the expected return using the equation as shown below:

E(R) = ( Return of first month + Return of second month + Return on third month + Return on fourth month ) / Number of months

     = (25% - 24% + 10.52631579%. + 16.66666667% ) / 4

     = 7.048245615%

Hence, the expected return is 7.048245615%.