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CA Final · Advanced Financial Management · Portfolio Management

Rohan holds Rs 10,00,000 in security A with an expected return of 11% p.a. He considers switching to security B with an expected return of 13.5% p.a. Selling A costs 1% of the sale value, and buying B has no cost. Treating returns as simple (non-compounded) annual returns on the capital invested, after about how many months will the switch break even? Take the result to two decimals.

The switch breaks even after about 5.07 months. The 1% selling cost of Rs 10,000 leaves Rs 9,90,000 to invest in B, earning Rs 1,33,650 a year against Rs 1,10,000 from A. The yearly gain is Rs 23,650, so recovery takes 10,000 divided by 23,650 years.

  1. A5.07 monthsCorrect
  2. B4.80 months
  3. C10.15 months
  4. D1.09 months

Explanation

Sale cost is Rs 10,000, so Rs 9,90,000 goes into B. Annual income from B is Rs 1,33,650 against Rs 1,10,000 from A, a gain of Rs 23,650 a year. Break-even time is 10,000 / 23,650 = 0.4228 years, or 5.07 months. Using 10,000 / 25,000 gives 4.80 months, which wrongly ignores that less capital moves into B.

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