Question

A stock was trading at $117.40 at the end of year 1. It was trading at the end of year 2 at $110.70 immediately after giving a dividend of $3.60. At the end of year 3. it was trading at $120.90 immediately after giving a dividend of $3.80. Finally, it was trading at $131.00 at the end of year 4 without giving out any dividend. What was the arithmetic average annual return of this stock for the three years between years 1 and 4?

Answer 1

Return from year 1-2 =(Stock price in year 2+Dividend-Stock price in Year 1)/Stock price in Year 1 =(110.70-117.40+3.60)/117.40
=-2.6405%

Return from year 2-3=(Stock price in year 3+Dividend-Stock price in Year 2)/Stock price in Year 2 =(120.90-110.70+3.80)/110.70
=12.6468%

Return from year 3-4=(Stock price in year 4+Dividend-Stock price in Year 3)/Stock price in Year 3 =(131-120.90+0)/120.90
=8.3540%

Arithmetic average =(-2.6405%+12.6468%+8.3540%)/3 =6.1201% or 6.12%