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27 October, 08:28

You are considering purchasing a stock that currently sells for $50. The expected price of the stock in a year is $45, and during the coming year a $2 dividend is expected to be paid. The risk-free rate is 5% and the market return is 10%. The stock has a beta of 0.85. What is the holding period return of the stock

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  1. 27 October, 09:15
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    The holding period return of the stock is - 6 % or - 6.0%

    Explanation:

    Solution

    Given that:

    You are thinking of purchasing a stock that currently sells for = $50

    The expected price of the stock = $45

    Dividend expected to be paid = $2

    Risk free rate = 5%

    Market return = 10%

    Stock (beta) = 0.85

    We will now find the holding period return of the stock which is given below:

    The formula for calculating the holding period return of a stock is given as,

    = The Expected price in a year + Dividend earned during the year - Purchase Price / Purchase Price

    We recall that:

    The Purchase Price = $ 50

    Expected price in a year = $ 45

    Dividend earned during the year = $ 2

    Now,

    By Applying the above values in the formula we have the holding period return of the stock as:

    = [45 + 2 - 50] / 50

    = - 3 / 50

    = - 0.0600 = - 6.00 %

    = - 6.0 % (when rounded off to one decimal place)

    Therefore, the Holding period return of the stock is - 6 % or - 6.0%
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