Question

You are considering two investment alternatives. The first is a stock that pays quarterly dividends of

$0.36

per share and is trading at

$22.37

per share; you expect to sell the stock in six months for

$25.36.

The second is a stock that pays quarterly dividends of

$0.43

per share and is trading at

$26.63

per share; you expect to sell the stock in one year for

$28.61.

Which stock will provide the better annualized holding period return?

The 1-year HPR for the first stock is

nothing%.

(Enter as a percentage and round to two decimal places.)

Answer #1

In the Given question we have to calculate the holding period return for the two stocks

Formula for holding period return is as follows

Holding period return= [(P1-P0+D1)/P0]*100

where P1= Stock price when to sell

P0=Stock price when we buy

D1=Dividends recieved during the period of holding.

Calculation of HPR for first stock

(0.36+0.36+25.36-22.37)/22.37 = 16.5847% per half year

Calulation of holding period return for second stock

(0.43*4+28.61-26.63)/26.63 = 13.894% Per full year

By comparing the both we can see that first stock is giving 16.5847% return for 6 months itself(Annualised 33.17 approx) where as return from second stock is only 13.894% per annum

**Hence first stock will provide the better annualised
return**

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