- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 52. Portfolio Risk and Return: Part I
- Subject 1. Major Return Measures

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**CFA Practice Question**

Assume the following series of transactions:

t1: Purchase 10,000 shares of Intelligent Semiconductor for $98.90 per share

t2: Sell 10,000 shares of Intelligent Semiconductor for $105.30 per share

t3: Sell 5,000 shares of Intelligent Semiconductor for $111.65 per share

t4: Sell 5,000 shares of Intelligent Semiconductor for $140.00 per share

B. 58.27%

C. The answer cannot be calculated from the information provided.

t0: Unknown

t1: Purchase 10,000 shares of Intelligent Semiconductor for $98.90 per share

t2: Sell 10,000 shares of Intelligent Semiconductor for $105.30 per share

t3: Sell 5,000 shares of Intelligent Semiconductor for $111.65 per share

t4: Sell 5,000 shares of Intelligent Semiconductor for $140.00 per share

Similar investments have merited a 13.45% discount rate. Assuming no taxes or transaction charges, what is the dollar-weighted rate of return for this series of investments?

A. 66.11%

B. 58.27%

C. The answer cannot be calculated from the information provided.

Correct Answer: C

Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. In fact, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. With this said, in the determination of the dollar-weighted rate of return, the first step should be to identify the cash flows for each period, beginning with t0: the initial investment outlay.

In this example, the initial cash outlay is not specified, and therefore the calculation of the dollar-weighted rate of return cannot accurately be determined.

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**User Contributed Comments**
14

User |
Comment |
---|---|

KD101 |
Simply speaking, bouhgt 10000 and sold 20000 - so no return can be calculated |

hagi10 |
I came up with 66.11%. Because for the unknown To, I placed 0. and that was not true. |

tssverma |
does make sense to calculate and IRR when 10000 shares are brought and 20000 are sold |

tenny45 |
What if the question asked for the TIME-WEIGHTED RATE OF RETURN? Would the answer still be undetermined? |

yly13 |
if for time weighted, u'd be able to get the return between t1 and t3, overall would still be undetermined. |

yly13 |
i meant t1 and t2 |

Cooltallgal |
I assume t0 is zero because the question said "Assuming there is no taxes or transaction charges so I guess the person is short selling the shares. I got 66.11% using the CF funtion of the BA II. lol. This question is a bit tricky!!! |

surob |
Cooltallgal:Agreed |

magicchip |
here is another theory: he owned 10000 shares at t0. If the discount rate is 13.45, you can use the cost per share at t1 and discount accordingly to arrive at price at t0. Then multiply by 10000 and viola, you have t0. That will give an IRR of 9.917 That is assuming he had no shares prior to tt0, but since it's not stated, the answer is correct. |

yesandy11 |
What about a stock split? That could be the case, the only clue it's not is t0... |

robertucla |
Trick question! |

johntan1979 |
Unknown is NOT the same as ZERO... sigh... |

RickyL |
Unknown is a big 0 |

abs013 |
Haha Bought 10,000 Sold 20,000 |