Calculating and Interpreting Measures ...
Measures of dispersion are used to describe the variability or spread in a... Read More
Holding period return refers to the change in the value of an investment over the period it is held, expressed as a percentage of the originally invested amount. It also captures any additional income that one earns from an investment.
$$ \text{HPR} =\cfrac { (\text{Ending value} – \text{beginning value} + \text{asset income}) }{ \text{beginning value} } $$
Ending value is simply the value of the investment at the end of the period. Beginning value is simply the amount invested at the start of the period. Asset income is any additional benefit received by the investor during the period of investment, e.g. dividends from shares.
If we let:
beginning value to be P0,
Ending value to be P1
Asset income to be D,
Then we can shorten the formula above to:
$$
\text{HPR} =\cfrac { (P_1 – P_0 + D) }{ P_0 } $$
Five years ago, Matthew paid $14 per share for 200 shares in XYZ insurance company. The current share price has grown by 50% of the purchase price. So far, he has received 12 dividend payments, each amounting to $0.05 per share. If Matthew decides to sell the shares at present, what will be the holding period return?
First, we establish values of P0, P1, and D:
P0 = 14 * 200 = 2800
P1 = 1.5 * 14 * 200 = 4200
D = 0.05 * 200 * 12 = 120
Therefore,
\( \text {Holding period return} = \cfrac {(4200 – 2800 + 120)}{2800} = 54.3\%\)
We can use the holding period return to find the true investment return per every unit of money e.g. per unit dollar. This is because it incorporates all the additional income received. It can also be used to determine any loss from an investment. In such a scenario, HPR would be negative.
Question
A chartered analyst purchased a treasury bill for $960 and then sold it for $995 three months later. Calculate the holding period return.
A. 35%
B. 35
C. 3.6%
Solution
The correct answer is C.
First, we establish our key values:
P0 = 960
P1 = 995
D = 0 in this case
Therefore,
$$ \begin{align*}
\text{HPR} & =\cfrac {995 – 960}{960} \\
& =\cfrac {35}{960} = 3.6\% \\
\end{align*} $$
Reading 7 LOS 7c
Calculate and interpret a holding period return (Total return)