Question

Suppose you buy a stock that earns a 2% return the first year, 4% the second year, 8% the third year, -5% the fourth year, and 10% the fifth year. What is the holding period return?

		3.94%
		None of these
		3.67%
		19.72%
		3.80%

Answer 1

Holding period return is calculated using the below formula:

(1+ HPR)= [(1+ r1)*(1+ r2)*(1+r3)*(1+r4)*(1+r5)

                  = [(1+ 0.02)*(1+0.04)*(1+ 0.08)*(1- 0.05)*(1+ 0.10)]

                  = [1.02*1.04*1.08*0.95*1.10]

                  = 1.1972

HPR= 1.1972 -1 = 0.1972 = 19.72%.

Therefore, the answer is option 2.