Rate of Return on the investment

[desmond1099]

Thank you so much to manowar, PBR & revenant…Finally I got some1 to clear my confusion…
So can I conclude that we shall follow the errata rather than the answers to the problems at the end of the chapter??
And thus, the “supposingly correct” calculation and solution for the above Q should be:-
Initial investmet
= Margin requirement + Purchase Commissions
= (.45 * $5600) + $155
= $2675—-(A)
Ending value/proceeds
= (Difference between stock price X No. of Shares) - Dividends (If any) - Sell Commission
= ($11*100) - ($2.50*100) - $145
= $705—-(B)
The rate of return on investment
=A/B%
=$705/$2675
=26.36%
BUT come think of it, is that logic to deduct both the purchase & sale commission from from the numerator, i.e. we are trying to get the “NET PROCEEDS/PROFIT” from the investment after take into consideration ALL outflows?
Come on, let’s argue…

 

[revenant]

I don’t get what CFAI are saying in the errata, maybe because I don’t have the CFAI text with me now.
But anyway, if there is an errata, surely we will follow the errata since its purpose is to correct the error? lol

 

[manowar]

Dear desmond1099
I have checked the errata. In the CFA text book, the numerator is the ending value of investment (excluding $100 initial commission and investment) and the denominator includes only the initial commission and investment. Therefore, the result here much be deducted by 1. If you include the initial investment in the numerator (the capital gain or difference b/w stock price), you should also include the initial commission. The result thus is not needed to deduct by 1.
It is just a simple HPR formula
HPR = (ending value/beginning value) - 1 or (ending value - beginning value)/beginning value

 

[manowar]

For clearer explanation, the amount of $ 4500 that you buy back shares includes the initial margin. Since you put aside of money so at the end of a short sale, you will use this margin plus with additional money.

 

[desmond1099]

manowar Wrote:
——————————————————-
> Dear desmond1099
>
> I have checked the errata. In the CFA text book,
> the numerator is the ending value of investment
> (excluding $100 initial commission and investment)
> and the denominator includes only the initial
> commission and investment. Therefore, the result
> here much be deducted by 1. If you include the
> initial investment in the numerator (the capital
> gain or difference b/w stock price), you should
> also include the initial commission. The result
> thus is not needed to deduct by 1.
>
> It is just a simple HPR formula
>
> HPR = (ending value/beginning value) - 1 or
> (ending value - beginning value)/beginning value
Hi Manowar, you ‘re the man!!
I think u have just cleared all my confusion, and i can see where the confusion came from …Actually both the errata and the answers to the problems at the end of the chapter are both correct. It’s just a different way of presenting the calculation…
I have tried to work out the answer using the two formulas, and the results are just the SAME…
thanks again man….=P