We compute the holding period return as the sum of capital gain and dividend yield.
The price of a given share now and one year from now are $2 and $2.5, respectively. The dividend paid in one year equals 20 cents. The holding period return thus equals
A. 40 percent,
B. 32 percent,
C. 35 percent.
Solution: C. is correct.
We compute the holding period return, denoted by R, as
R = Capital gain + dividend yield
= (P_t – P_t-1)/P_t-1 + D_t/P_t-1
= (2.5 – 2)/2 + 0.2/2
= 0.25 + 0.1
= 35 %.