Question

A stock was trading at $20.95 at the end of year 1. It was trading at the end of year 2 at $21.28 immediately after giving a dividend of $0.24. At the end of year 3. it was trading at $20.64 immediately after giving a dividend of $0.26. Finally, it was trading at $22.46 at the end of year 4 without giving out any dividend. What was the geometric average annual return of this stock for the three years between years 1 and 4?

Answer 1

Return from year 1-2 =(Stock Price Price year 2-Stock Price Year 1+Dividend)/Stock Price Year 1 =(21.28-20.95+0.24)/20.95=2.7208%

Return from year 2-3 =(Stock Price Price year 3-Stock Price Year 2+Dividend)/Stock Price Year 2 =(20.64-21.28+0.26)/21.28
=-1.7857%

Return from year 3-4 =(Stock Price Price year 4-Stock Price Year 3+Dividend)/Stock Price Year 3
=(22.46-20.64+0)/20.64=8.8178%

Geometric Average Annual return =((1+2.7208%)*(1-1.7857%)*(1+8.8178%))^(1/3)-1 =3.16%