Annualized Returns Problem

Calculating the annualized returnFor calculating the annualized return calculating the equivalent annual return is important. If you buy the stock, your $28,000 will purchase 700 shares, or 7 round lots. A call contract costs $400, so you can buy 70 of them. If, in six months, MMEE is selling for $48, your stock will be worth 700 shares × $48 = $33,600. Your dollar gain will be $33,600 less the $28,000 you invested, or $5,600. Since you invested $28,000, your return for the six-month period is $5,600/$28,000 = 20%. To annualize your return, we need to compute the effective annual return, recognizing that there are two six-month periods in a year.To annualize your return, we need to compute the effective annual return, recognizing that there are two six month periods in a year. 1 + EAR = 1.24^2 = 1.5376 EAR = .5376 = 53.76% Your annualized return on the stock is 53.76%. If MMEE is selling for $36 per share, your loss on the stock investment is –11% (36-40)/40, which annualizes as follows: 1 + EAR = 1+(-.11) = .89^2 = .7941 EAR = –.2545 = –25.45% At the $48 price,