Question

Question 9 (1 point) You purchased 100 shares of stock for $5 per share. After holding the stock for 8 years and not receiving any dividends, you sell the stock for $42 per share. What are the holding period and annual return on this investment? 185%, 14.42% 920%, 41.63% 740%, 30.48% 625%, 27.66%

Answer 1

(i). Calculation of Holding Period Return(HPR): It is defined as the total return on the asset over the period for which iit has been hold or invested in the portfolio.

Formula for the calculation of HPR: HPR = [(Final value of the investement - Initial invested amount ) / Initial amount invested] * 100

where, Final value of investment = Appreciation in the investment value + Income from investment(dividends).

From the above question we have following information:

Number of shares = 100

Initial price = $5

Total initial invested amount = 100 * $5 = $500

Final price = $42

Total final price of the investment = 100 * $42 = $4,200

Number of years invested (n) = 8 years

There are no dividends earned for the entire period of holding this investment.

therefore, HPR = [($4,200 - $500) / $500] * 100 = 740%

Hence, the Holding Period Return is 740%

(ii). Now we will calculate Annual return for the same question and the given data.

Annual return = {[(Final value of the investment / initial value of the investment) ^(1/n) ] - 1} * 100

Now we will put the values in the above formula to get annualized return(annual return).

therefore, annualized return = {[($4,200 / $500)^(1/8)] - 1} * 100

or, annualized return = {[(8.4)^(1/8)] - 1} * 100

or, annualized return = {[1.3048] -1} * 100

or, annualized return = {0.3048 * 100} = 30.48%

Hence, annual return for the given stock for the given period of investment is 30.48%