Question

The expected return on a stock is comprised of a:

a) dividend yield and a capital gains yield.

b) current yield and a terminal value.

c) dividend yield and ROE.

d) sustainable growth rate and a plowback yield.

Answer 1

The expected return is the total return received on a security or a portfolio over the period for which the security or portfolio has been held. The total return comprises of the capital gains yield and dividend yield.

• Dividend yield on a stock = D / Po

where Do is the dividend received during the period for which the stock was held.

Po is the stock price at the beginning of the period

• Capital gains yield = (P1 - Po) / Po

where Po is stock price at the beginning of the period,

P1 is the stock price at the end of the period

• Total return is calculated as:

Total (or expected) return = Dividend yield + Capital gains yield

Hence, the correct answer is Option A (dividend yield and a capital gains yield).