# Chapter5 - 1 Chapter 5 RISK AND RETURN PAST AND PROLOGUE...

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Chapter 5 RISK AND RETURN: PAST AND PROLOGUE 1

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Single-Period Rate of Return Holding-period return (HPR) : Rate of growth over an investment period, i.e. dollars earned per dollar invested Annual percentage rate vs. Effective annual rate 2 yield Dividend yield gains Capital price Beginning dividend Cash price Beginning price Beginning price Ending HPR n EAR APR n APR EAR APR n n n ] 1 ) 1 [( 1 1 year a in periods of number rate interest periodic / 1
Finding n in a EAR/APR problem Every APR/EAR problem has a return interval m which is the length of holding period. i.e. 1 quarter, 1 month, 2 months, 8 days etc N is the number of periods of length m in a year (n=year/m) 1 quarter: n=4 1 month: n=12 2 months : n=6 8 days: n=365/8=45.625 3

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Example on Single-Period Rate of Return Suppose you bought a share of Home Depot at the opening price of \$33.45 a share on Monday, Dec 6, 2010. You sold the stock on Friday, Dec 10, 2010 at the closing price of \$34.40 a share. The company paid out \$0.35 a share regular dividend on Thursday, Dec 9, 2010. (a) Ignoring transaction costs, what was the five-day HPR of this investment? (b) What was the APR and EAR of this investment? (sub question, what is n in this question?) 4 % 886 . 3 45 . 33 \$ 35 . 0 \$ 45 . 33 \$ 45 . 33 \$ 40 . 34 \$ (a) HPR % 678 . 283 5 365 03886 . 0 (b) APR % 824 . 516 , 1 1 73 83678 . 2 1 73 EAR
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