Although investing all at once works best when stock prices are rising, dollar-cost averaging can be a good way to take advantage of a fluctuating market. Dollar-cost averaging is an investment strategy designed to reduce volatility in which securities are purchased in fixed dollar amounts at regular intervals regardless of what direction the market is moving. This strategy is also called the constant dollar plan. You are considering a hypothetical $1,200 investment in a media company's stock. Your choice is to invest the money all at once or dollar-cost average at the rate of $100 per month for one year. Assume that the company allows you to purchase "fractional" shares of its stock. (a) If you invested all of the money in January and bought the shares for $12 each, how many shares could you buy? shares (b)From the following chart of share prices, calculate the number of shares that would be purchased each month using dollar-cost averaging and the total shares for the year. Round to the nearest tenth. Month Amount Invested Cost per Share Shares Purchased Month Amount Invested Cost per Share Shares Purchased January $100 $12.00 July $100 $13.40 February 100 11.65 August 100 12.60 March 100 10.90 September 100 11.80 April 100 9.65 October 100 12.50 May 100 11.25 November 100 11.45 June 100 12.25 December 100 12.05 total shares = (c)What is the average price you pay per share if you purchase them all in January? (d)What is the average price you pay per share if you purchase them using dollar-cost averaging? (Round your answer to the nearest cent.)

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 1MC

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Although investing all at once works best when stock prices are rising, dollar-cost averaging can be a good way to take advantage of a fluctuating market. Dollar-cost averaging is an investment strategy designed to reduce volatility in which securities are purchased in fixed dollar amounts at regular intervals regardless of what direction the market is moving. This strategy is also called the constant dollar plan.

You are considering a hypothetical $1,200 investment in a media company's stock. Your choice is to invest the money all at once or dollar-cost average at the rate of $100 per month for one year. Assume that the company allows you to purchase "fractional" shares of its stock.

(a) If you invested all of the money in January and bought the shares for $12 each, how many shares could you buy?

(b)From the following chart of share prices, calculate the number of shares that would be purchased each month using dollar-cost averaging and the total shares for the year. Round to the nearest tenth.

Month	Amount Invested	Cost per Share	Month	Amount Invested	Cost per Share
January	$100	$12.00	July	$100	$13.40
February	100	11.65	August	100	12.60
March	100	10.90	September	100	11.80
April	100	9.65	October	100	12.50
May	100	11.25	November	100	11.45
June	100	12.25	December	100	12.05

total shares =

(c)What is the average price you pay per share if you purchase them all in January?

(d)What is the average price you pay per share if you purchase them using dollar-cost averaging? (Round your answer to the nearest cent.)

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