Question: Return with Changing Investments
What is the average monthly return of the following investment?
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Month
|
Action (assuming occur at the end of the period)
|
Cash Flow
|
|
0
|
Buy one share @ $50
|
|
|
1
|
Buy another share @ $53
Stock pays $2 dividend per share
|
|
|
2
|
Stock pays $2 dividend per share
Sell all shares @ $54
|
|
1) Dollar Weighted Approach
2) Time Weighted Approach
Which one is minimizing the influence of the actions of investments (flows)?
Which one is a more appropriate measure of wealth change from the investor's perspective?