Question

A stock had the following year-end prices and dividends:

Year            Price                    Dividend

0                    $58.75                   --

1                      68.56                  1.14

2                      61.78                    1.33

3                     70.20                     1.49

What was the arithmetic average return for the stock?

Answer 1

Year 0 - Year 1:

Rate of Return, r1 = (Closing Price + Dividend - Opening Price) / Opening Price

= ( $ 68.56 + $ 1.14 - $ 58.75 ) / $ 58.75 = 0.1864

Year 1 - Year 2:

Rate of Return, r2 = (Closing Price + Dividend - Opening Price) / Opening Price

= ( $ 61.78 + $ 1.33 - $ 68.56 ) / $ 68.56 = - 0.0795

Year 2 - Year 3:

Rate of Return, r3 = (Closing Price + Dividend - Opening Price) / Opening Price

= ( $ 70.20 + $ 1.49 - $ 61.78 ) / $ 61.78 = 0.1604

Arithmetic Average Return for the Stock = ( r1 + r2 + r3 ) / 3 = ( 0.1864 - 0.0795 + 0.1604 ) / 3 = 8.91%