Question

Question 8: You bought 1000 shares of Huawei's stock at $32.20 per share 4 years ago and now you decided to sell it to travel to Europe this summer holiday. Now the market price of the stock is $59.70. What are the (1) holding period return, (2) average annual return, and (3) the annualized rate of return?

Answer 1

Sol:

No of share purchased = 1000

Purchase price (P) = $32.20 per share

Selling price (S) = $59.70 per share

Period (n) = 4 years

Holding period return = (S - P) / P

Holding period return = (59.70 - 32.20) / 32.20

Holding period return = 27.5 / 32.20 = 85.40%

Average annual return = Holding period return / Number of periods

Average annual return = 85.40% / 4 = 21.35%

Annualized rate of return = (1 + Holding period return)^1/n - 1

Annualized rate of return = (1 + 85.40%)^1/4 - 1

Annualized rate of return = (1 + 0.854)^1/4 - 1

Annualized rate of return = (1.854)^1/4 - 1

Annualized rate of return = 1.166883 - 1 = 0.166883 or 16.69%

Therefore annualized rate of return will be 16.69%