quiz 3

quiz 3 - Rates of Return Measuring ExPost (Past) Returns...

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Rates of Return Measuring ExPost (Past) Returns One period investment: regardless of the length of the period . Holding period return (HPR): HPR = (P S + CF- P B )/P B where P S = Sale price (or P1) P B = Buy price (\$you put up) (or P0) CF = Cash flow during holding period • HPR is percentage return . No size-of-investment concerns. • CF realized by the end of the period. Annualizing HPRs Q: Why would you want to annualize returns? 1. Annualizing HPRs for holding periods of greater than one year: – Without compounding (Simple or APR): HPRann = HPR/n – With compounding: EAR HPRann = [(1+HPR)^1/n] -1 Where n = number of years held Suppose you buy one share of a stock today for \$45 and you hold it for 2 years and sell it for \$52. You also received \$8 in dividends at the end of the two years. • PB=\$45, PS=52, CF=8, n=2 • HPR=(52+8-- 45)/45=33.33% • HPRann= 33.33%/2=16.66% simple rate • Assuming annual compouding, – HPRann=(1+0.3333)^1/2 1 = 15.47% An example when the HP is < 1 yr: Suppose you have a 5% HPR on a 3 month investment. What is the annual

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This note was uploaded on 05/12/2011 for the course FIN 300 taught by Professor Wang during the Spring '11 term at UChicago.

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quiz 3 - Rates of Return Measuring ExPost (Past) Returns...

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