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In-line exercise: security returns, solution (2)

Ursidae Corp's common stock was worth $50/share at the end of December, $55/share at the end of January, $40/share at the end of February, and $21/share at the end of March. There was a $4 dividend paid in February, and a 2-for-1 stock split in March. Compute the three monthly rates of return for Ursidae Corp.

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R1 = (55 - 50)/50 = 10%

R1 = (40+4-55)/55 = -20%


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Phil Dybvig
During the second month, we start with a share valued at $55 that falls to $40, but we also receive a $4 dividend. Therefore, the change in value is from $55 to $44 (equals $40 for the share plus $4 cash from the dividend), for a change of -$11. The rate of return is -$11/$55, or -20%.

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