Suppose An Investor Acquired 100 Shares Of Walden Stock

Suppose an investor acquired 100 shares of Walden stock at $30/share last year

Suppose an investor acquired 100 shares of Walden stock at $30/share last year. If the investor received a $1.00/share cash dividend during the year, and sells all of the shares at year-end for $32.00/share, then (a) What is the total dollar return? (b) What is the total percent return? (c) If the Dow Jones Industrial Average (DJIA) stock index went from 12,080 at the date of purchase to 13,000 at the date of sale, did the investor beat the market, i.e., receive a higher percentage return than the DJIA?

Paper For Above instruction

The investment scenario presents a comprehensive case for analyzing stock returns, including dividend income, capital gains, and relative market performance. This paper aims to dissect the calculations for total dollar return, total percentage return, and compare the investment's performance to the overall market index, the DJIA, over the same period.

Introduction

Investing in stocks involves understanding various return metrics that measure the success of an investment. The total dollar return considers both capital appreciation and income received, whereas the percentage return contextualizes this gain relative to the initial investment. Comparing personal investment returns to market indices provides insight into whether the investor outperformed the overall market. This case study employs a real-world example involving Walden stock purchases, dividends, and market index comparisons to elucidate these concepts.

Calculating Total Dollar Return

The total dollar return encompasses capital gains and dividends received during the investment period. In this scenario, the investor purchased 100 shares at $30 per share, received dividends, and sold the shares at a higher price. The variables are as follows:

• Number of shares = 100
• Purchase price per share = $30
• Dividend per share = $1.00
• Selling price per share = $32.00

The initial investment amount is:

Initial Investment = 100 shares × $30 = $3,000

The dividend income earned during the year is:

Dividend Income = 100 shares × $1.00 = $100

The sale proceeds from selling all shares at $32.00 per share are:

Sale Proceeds = 100 shares × $32 = $3,200

The total dollar return combines the capital gain and dividends:

Total Dollar Return = (Sale Price - Purchase Price) × Number of Shares + Dividends

Calculating step-by-step:

Total Dollar Return = ($32 - $30) × 100 + $100 = $2 × 100 + $100 = $200 + $100 = $300

Calculating Total Percentage Return

The total percentage return measures how much the initial investment increased relative to its original value, incorporating dividends:

Percentage Return = (Total Dollar Return / Initial Investment) × 100%

Applying the figures:

Percentage Return = ($300 / $3,000) × 100% = 0.10 × 100% = 10%

This indicates the investor achieved a 10% return over the investment period.

Market Performance Comparison

The rise of the DJIA from 12,080 at purchase to 13,000 at sale indicates the overall market appreciation during the period. We calculate the percentage increase in the DJIA to compare the investor’s performance:

Market Return = [(13,000 - 12,080) / 12,080] × 100%

Calculating:

Market Return = (920 / 12,080) × 100% ≈ 0.0761 × 100% ≈ 7.61%

The investor's total return of 10% exceeds the market’s approximate 7.61% increase, indicating the investor beat the market in percentage terms.

This outperformance suggests effective stock selection, dividend income, or favorable timing, achieving a higher return than the general market trend.

Conclusion

The analysis of the Walden stock investment reveals a total dollar return of $300, representing a 10% return relative to the initial investment. When compared to the market index’s approximate 7.61% growth, the investor outperformed the market. This highlights the importance of considering dividends and market performance when assessing investment success. Ultimately, individual stock analysis combined with market comparison provides valuable insights into the effectiveness of investment strategies.

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