Common Information
Abdul, Bikram and Chetan are three professional traders who trade in shares of a company XYZ Ltd.
Abdul follows the strategy of buying at the opening of the day at 10 am and selling the whole lot at the close of the day at 3 pm.
Bikram follows the strategy of buying at hourly intervals: 10 am , 11 am, 12 noon, 1 pm and 2 pm, and selling the whole lot at the close of the day. Further, he buys an equal number of shares in each purchase.
Chetan follows a similar pattern as Bikram but his strategy is somewhat different. Chetan’s total investment amount is divided equally among his purchases.
The profit or loss made by each investor is the difference between the sale value at the close of the day less the investment in purchase.
The “return” for each investor is defined as the ratio of the profit or loss to the investment amount expressed as a percentage.
Q. |
Common Information Question: 2/5 On a day of fluctuating market prices, the share price of XYZ Ltd. ends with a gain, i.e., it is higher at the close of the day compared to the opening value. Which trader got the maximum return on that day? |
✖ A. | Bikram |
✖ B. | Chetan |
✖ C. | Abdul |
✖ D. | Bikram or Chetan |
✔ E. | Cannot be determined |
Solution:
Option(E) is correct
Since Chetan’s return is always higher than or equal to that of Bikram, the trader with the maximum return would be either Abdul or Chetan.
If it is a continuously rising market then Abdul would end up having the highest gain as seen in the example above.
But there might be a scenario when the share price of XYZ would go down after 10 AM and rise in the end at 3 PM to a higher value.
In such a case, if Chetan gets the shares at lower prices than what the price was at 10 AM he would end up making more profit and hence higher return.
Table below can be scrolled horizontally
Time of the Day | Share Price (in Rs.) |
10 am (open) | 100 |
11 am | 110 |
12 noon | 140 |
1 pm | 150 |
2 pm | 180 |
3 pm (close) | 200 |
Here, Abdul’s returns remain unaltered as $100\%.$
Let, Chetan always buy shares worth Rs. 100.
So he would end up buying $1 + 10 + 10 + 10 + 10$ $= 41$ shares.
When he sells the same at Rs. 200 he gets Rs. 8,200 for the same.
$\therefore$ Chetan’s profit
$= 8200-500 = 7700$
$\therefore$ Chetan's return,
$\dfrac{7700}{500} > 100\%$
$\therefore$ We cannot say for sure who would have higher returns.
Hence, option E.