Question

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding period return for the year

Answer 1

Real Holding period return is - 6.45%

Step-by-step explanation:

Holding period return is the total return received in the form of dividend income and the selling and purchasing price difference within the period in which stock is held.

Return on stock = [ ( 50 - 55 ) + 3 ] / 55 = -3.64%

Real return

1+Nominal rate = ( 1 + real rate ) ( 1 + Inflation rate )

1+( -3.64%) = ( 1 + real rate ) ( 1 + 3%)

1 - 0.0364 = ( 1 + real rate ) ( 1 + 0.03)

-0.0264 = ( 1 + real rate ) x 1.03

1 + real rate = 0.9636 / 1.03

1 + real rate = 0.9355

Real rate = 0.9355 - 1

Real rate = - 0.0645 = -6.45%