1. Buffett purchased Berkshire Hathaway stock at $13 a share in 1965. By 2005, B
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Question
1. Buffett purchased Berkshire Hathaway stock at $13 a share in 1965. By 2005, BRK stock was trading at $140,000 a share. What is the geometric return for Buffett’s investment in 40 years
2. From 2002 to 2006, PBR stock has annual return of 25%, 18%, 22% 28% and 45%. What is the arithmetic average return, geometric return and variance?
3. A typical non-bank money transfer (such as MoneyGram) cost $15. If you were to transfer $150 to someone who needs those money in a different city every two weeks, what is the EAR for the transfer? What if you do it once a day?
Explanation / Answer
1) Geometric return = (140000/13)^(1/40)-1 = 26.13% 2) Year Return % d = r - Avg. r d^2 2002 25 -2.6 6.76 2003 18 -9.6 92.16 2004 22 -5.6 31.36 2005 28 0.4 0.16 2006 45 17.4 302.76 138 433.20 Average return = 138/5 = 27.60% Geometric return = (1.25*1.18*1.22*1.28*1.45)^(1/5)-1 = 27.28% Variance = (433.20/5) = 86.64% 3) % fee = 15/150 = 10%. EAR, if transfer is once every two weeks = 1.1^26-1 = 1091.82% EAR, if transfer is once a day = 1.1^365-1 = 128330558031338000.00%
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