Question

Last year, Xavier purchased 125 shares of Stock A at $96 per share, 30 shares of Stock B at $150 per share, and a $1000 bond with a 4.25% coupon for $1075. Xavier sold both stocks today. Stock A is worth $98 per share and Stock B has a value of $155 per share. Assuming neither stock paid a dividend, which investment has the lowest rate of return?

Stock A
Stock B
Bond
Stock A and Stock B

Answer 1

Answer : Stock A

Xavier purchased 125 shares of Stock A at $96 per share

After one year , Stock A is worth $98 per share

percentage return = $\frac{P_{1} - P_{0}}{P_{0}}$

$P_{0}$ - Initial stock price

$P_{1}$ - Final stock price

Stock A percentage return = $\frac{98 - 96}{96}$ = 2/ 96 = 2.08%

Stock B percentage return = $\frac{155 - 150}{150}$ = 5/ 150 = 3.3%

Given, $1000 bond with a 4.25% coupon for $1075

Coupn amount for bond = $\frac{4.25}{100}$ * 1000 = 42.5

Bond percentage return= coupon amount / 1075

$\frac{42.5}{1075}$ = 3.95%

Stock A has the lowest rate of return