Information about three securities appears below. Beginning-of-year Price End-of
ID: 363345 • Letter: I
Question
Information about three securities appears below. Beginning-of-year Price End-of-year Price Interest/dividend paid Stock 1s 42.56 $ 46.75 1.50 Stock 2 $ 1.25 $1.36 0.00 Bond 1 $1,020 $1,048 $41.00 a. Assuming interest and dividends are paid annually, calculate the annual holding period return on each security b. During the year, management of Stock 2 spent $10 million, or $0.50 a share, repurchasing 7.7 million of the company's shares. How, if at all, does this information affect calculation of the holding period return on Stock 2?Explanation / Answer
a. To annualize a holding period return means to find the equivalent rate of return per year. Assuming income and capital gains and losses are reinvested, i.e. retained in the portfolio, then: Annualized HPR = ((Dividend + End Value - Initial Value) / Initial Value + 1 ) ^ ( 1 / Years ) - 1.
Stock ! = [(1.5 + 46.75-42.5) / (42.5)+1] 1/1 - 1 = 0.1353
Stock 2= [{1.36-1.25)/1.25 + 1]1/1 - 1 = 0.088
Stock 3= [{41 + 1048-1020}/1020 + 1]1/1 - 1 = 0.0676
b. It is a poor indicator of the stock's performance. The actual performance is measure from the beginning to the end of the period.