Homework for Fin 550 Chap 4

This investment will return 50% if you place a limit order for $24 over a period of one month. The calculation is done by subtracting your initial $24 purchase from the current stock price ($36) and dividing the result by your initial price. So $(36 – 24) / 24 = 0.50 or 50%.

If you placed a market-based order, your return rate would be much lower because of the fall in the stock price during the month. Specifically, it would be calculated as $(20 – 24) / 24 = -0.17 or -17% because your purchase price was higher than what it dropped to before eventually jumping back up again. This particular investment would have not been profitable if the market had ordered it.

Overall then it is clear that while limit orders may provide potential benefits they also carry some risk should stock prices dip unexpectedly – so investors need carefully weigh up pros & cons each type when determining which route take going forward given current market conditions.