Question

A stock had the following year-end prices and dividends:

Year	Price			Dividend
0	$	59.35			—
1		69.86		$	1.19
2		62.18			1.43
3		71.30			1.54

What was the arithmetic average return for the stock?

11.63%

9.30%

15.18%

15.27%

8.49%

Answer 1

Yearly Return = [(Change in Share Price + Dividend per share) / Share Price at the Beginning] x 100

Year 1 Return

Year 1 Return = [{($69.86 - $59.35) + $1.19} / $59.35] x 100

= [($10.51 + $1.19) / $59.35] x 100

= [$11.70 / $59.35] x 100

= 19.71%

Year 2 Return

Year 2 Return = [{($62.18 – 69.86) + $1.43} / $69.86] x 100

= [(-$7.68 + 1.43) / $69.86] x 100

= [-$6.25 / 69.86] x 100

= -8.95%

Year 3 Return

Year 3 Return = [{($71.30 – 62.18) + $1.54} / $62.18] x 100

= [($9.12 + 1.54) / $62.18] x 100

= [$10.66 / $62.18] x 100

= 17.14%

Arithmetic average return for the stock

Arithmetic average return for the stock = Total Return / Number of years

= [$19.71% - 8.95% + 17.14%] / 3 Years

= 27.91% / 3 Years

= 9.30%

“Therefore, the Arithmetic average return for the stock would be 9.30%”