Question

The price of a stock is $53 at the beginning of the year and $50 at the end of the year. If the stock paid a $4 dividend and inflation was 4%, what is the real holding period return for the year? (Remember, real is the inflation adjusted percentage return)

Answer 1

The real holding period return is computed as shown below:

= [ (1 + Nominal holding rate of return) / (1 + inflation rate) ] - 1

Nominal holding rate of return is computed as follows:

= (Price at end of year - Price at beginning of year + dividend received) / Price at beginning of year

= ($ 50 - $ 53 + $ 4) / $ 53

= 1.886792453%

So, the real holding period return will be computed as follows:

= [ (1 + 0.01886792453) / (1 + 0.04) ] - 1

= - 2.03% Approximately

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