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Calculate Average (Price)

  1. Oct 28, 2011 #1
    Dear all,

    Although the following question involves some terms using finance, I post it here since it seems to involve some probability. I hope that it will be fine.

    Thank you very much for your help.

    ---------------------

    Problem: Suppose that John buys shares in only one company and he does so as follows:

    Date 1. He buys 10 shares @ $10.
    Date 2. He buys 5 shares @ $20.
    Date 3. He sells 6 shares @ $15.
    Date 4. He buys 10 shares @ $20.

    After Date 4, what is the average price per share for John's holdings?

    Attempt at Solution :

    Before Date 3, the weighted average price is given by:

    [itex]\frac{10}{15}$10 + \frac{5}{15}$20[/itex]

    and the total amount before Date 3 is just $30.

    At Date 3, John sells [itex] 6 \times $15 = $90 [/itex] of this stock

    [itex]\Rightarrow[/itex] Total stock holdings = [itex] 200 - 90 = $110 [/itex].

    Now, this is where I am having trouble. To calculate the average price, it appears that I would need to identify specifically the purchase dates of the 6 shares sold at Date 3, since Date 1 and Date 2 involve different purchase prices.

    Is this correct? If so, how would I continue my calculation if I were to assume that the 6 shares sold were randomly chosen from the 15 shares from Date 1 and Date 2?
     
  2. jcsd
  3. Oct 28, 2011 #2

    mathman

    User Avatar
    Science Advisor
    Gold Member

    For tax purposes, he needs to identify. However as your calculation shows, it doesn't matter otherwise. In fact you can simply add up his purchases, 25 shares for $400 and his sales 6 shares for $90, leaving 19 shares for $310.
     
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