Calculating Rate of Return on a Stock Investment (Capital Gains Only)
The general formula for rate of return can be applied to stock investments. For instance, if an investor purchases shares for $1,000 and, after one year without receiving dividends, sells them for $1,100, the rate of return is 10%. The calculation is based on the ratio of the final value to the initial investment: $1 + \text{rate of return} = \frac{$1,100}{$1,000} = 1.10$, yielding a 10% return.
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Calculating Rate of Return on a Stock Investment (Capital Gains Only)
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An investor purchases two different assets at the beginning of the year for $1,000 each.
- Asset A provides a $50 cash payment to the investor during the year, but its market price at the end of the year is $950.
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Which statement best analyzes the contribution of the market price change to each asset's overall rate of return for the year?
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An investor who buys a marketable asset is guaranteed a positive rate of return as long as the asset generates a steady stream of income payments (e.g., rent or dividends), regardless of what happens to the asset's market price.
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- Asset Y: Paid $8 in income during the year and was sold for $107.
Which statement correctly analyzes the composition of the total return for these two assets?
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Learn After
An investor purchases 50 shares of a company at $20 per share. One year later, the investor sells all 50 shares for $24 per share. During the year, the company did not issue any payments to shareholders. What was the investor's rate of return on this investment?
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An investor is reviewing the performance of several stocks they held for one year. Match each stock's purchase and sale price scenario to its correct annual rate of return. Assume no payments were made to the shareholder during the holding period.
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