Question

A stock was trading at $20.65 at the end of year 1. It was trading at the end of year 2 at $20.98 immediately after giving a dividend of $0.22. At the end of year 3. it was trading at $20.34 immediately after giving a dividend of $0.24. Finally, it was trading at $22.16 at the end of year 4 without giving out any dividend. What was the geometric average annual return of this stock for the three years between years 1 and 4?

Answer 1

Return from stock = (Increase in value of stock + Dividend received) / Value at base year

Return between Year 1 and 2 = (($20.98 - $20.65) + $0.22) / $20.65
= 0.0266 or 2.66%

Return between Year 2 and Year 3 = (($20.34 - $20.98) + $0.24) / $20.34
= $ -0.4 / $20.34
= -0.0197 or -1.97%

Return from Year 3 and Year 4 = (($22.16 -$20.34) +$0) / $20.34
= 0.0895 or 8.95%

Geometric average annual return = (Return of Year 1 * Return of Year 2 * Return of Year 3)^(1/3)
= (0.0266 * -0.0197 * 0.0895)^(1/3)
= -0.0361 or -3.61%