Return On Investment and Cost Averaging Strategy

CHAPTER 3
RETURN ON INVESTMENT AND COST
AVERAGING STRATEGY

- Pn. Sazazila Abdullah-

• What do you understand by return on investment
(ROI)?

• Return on investment refers to the return value of each
ringgit invested by the investor .

• The formula for calculating return on investment is

Re turn on investment  Total return 100 %

Value of initial investment

Example 1

• In year 2015 , Puan Zainab bought unit trusts of
• RM 10 000 . After two years , she sold all the unit

trusts and received RM 10 400 . She received
dividend of
• RM 350 twice during the time she was holding the
unit trusts . Calculate the return on investment for
Puan Zainab.

Solution:

• - Initial capital = RM 10000
• -Total return = 350 x 2 +( RM 10 400 -10 000)
• =1100

Re turn on investment  1100 100 %
10000

 20%

Example 2

• Encik Yusof used RM 8000 to buy shares of company A .
He received dividend of RM 200 during the time he was
holding the shares . Subsequently , he sold all shares
and received RM 8800 . Calculate the return on
investment for Encik Yusof .

• Solution: Re turn on investment  1000 100%
• - Initial capital = RM 8000 8000

• -Total return  12.5%

• = 200 + ( 8800 - 8000)

• =1000

• Cost averaging strategy

• Cost averaging strategy involves investing a fixed
amount of money for a specific period ( such as
monthly , quarterly , or yearly ) irrespective of share
market conditions .

Example 3

Suhaimi invested RM 24 900 in share P with averaging
strategy in April and May . In April , the price of share P is
RM 2.10 per unit . In May , the price of share P is RM 2.01
per unit . Calculate the number of shares owned by
Suhaimi .

• Solution INVESTMENT
AMOUNT
MONTH 12450

APRIL 12450
MAY
TOTAL 24900

• Solution Total shares

12450  12450
2 . 10 2 . 04

 5929  6103

 12032 units

• Example 4

• Encik Hashim has RM 24 000 . He invested the same
amount of money in share s in the designated months .

• The table shows the purchase of shares by Encik

Hashim in the designated months .

Month June August October Disember

Share 2.30 2.10 2.05 2.20

price per

unit (RM)

• Calculate the average cost per share for the shares
owned by Encik Hashim.

• Solution

Total shares
6000  6000  6000  6000
2 . 30 2 . 10 2 . 05 2 . 20
 2609  2587  2927  2727
 11120 units

• Solution

Average cos t
 investment amount

number of share units owned
 24000

11120
 RM 2 . 16