Question

Consider the purchase of a stock at the beginningof Year 1 at $40 per share. During the years1 through 4, you have the following results:

Year     Dividend at end of the period                         Ending stock price

1                      $1.00                                                               $42.00

2                      $1.50                                                               $42.18

3                      $2.00                                                               $38.70

4                      $2.50                                                               $40.00

What is the average annual return on this investment?

Answer 1

Year 1:

Rate of Return, r1 = (Ending Stock Price + Dividend - Beginning Sock Price) / Beginning Sock Price
Rate of Return, r1 = ($42.00 + $1.00 - $40.00) / $40.00
Rate of Return, r1 = 0.0750

Year 2:

Rate of Return, r1 = (Ending Stock Price + Dividend - Beginning Sock Price) / Beginning Sock Price
Rate of Return, r1 = ($42.18 + $1.50 - $42.00) / $42.00
Rate of Return, r1 = 0.0400

Year 3:

Rate of Return, r1 = (Ending Stock Price + Dividend - Beginning Sock Price) / Beginning Sock Price
Rate of Return, r1 = ($38.70 + $2.00 - $42.18) / $42.18
Rate of Return, r1 = -0.0351

Year 4:

Rate of Return, r1 = (Ending Stock Price + Dividend - Beginning Sock Price) / Beginning Sock Price
Rate of Return, r1 = ($40.00 + $2.50 - $38.70) / $38.70
Rate of Return, r1 = 0.0982

Average Return = [r1 + r2 + r3 + r4] / 4
Average Return = [0.0750 + 0.0400 + (-0.0351) + 0.0982] / 4
Average Return = 0.1781 / 4
Average Return = 0.0445 or 4.45%

So, average annual return on this investment is 4.45%