An investor purchased stock priced at $30 and sold the stock for $34 two years later. The holding period return on the stock was _____ and the effective annual rate was _____?

Question

Quizplus · Accepted Answer

The holding period return (HPR) is calculated as (P1 - P0 + D) / P0, where P1 is the ending price, P0 is the beginning price, and D is dividends received. In this case, assuming no dividends, HPR = ($34 - $30) / $30 = 13.3%. The effective annual rate (EAR) can be calculated using the formula [(1 + HPR)^(1/n)] - 1, where n is the number of years. Here, EAR = [(1 + 0.133)^(1/2)] - 1 = 6.46%.

An Investor Purchased Stock Priced at $30 and Sold the Stock