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10 Questions

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Rates of Returns and HPR Quiz

Created by

@PalatialHedgehog

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Questions and Answers

What are the two components of return on any asset?

Income component and capital gains/loss (correct)

Cash flow and investment period

Initial investment and final value

Dividends received and stock price changes

What does HPR stand for in the context of rates of returns?

Hedge Portfolio Return

High Potential Returns

Historical Price Ratio

Holding Period Return (correct)

How is the arithmetic average return calculated for an investment over multiple periods?

$\frac{T}{\sum_{t=1}^{T} R_t}$

$\frac{1}{T} \sum_{t=1}^{T} (1+R_t)$

$\frac{1}{T} \prod_{t=1}^{T} (1+R_t)$

$\frac{1}{T} \sum_{t=1}^{T} R_t$ (correct)

If the stock price for Stock A was $10 per share 1 year ago, and is currently trading at $9.50 per share with shareholders receiving a $1 dividend, what return was earned over the past year?

$5 ext{%}$ Signup and view all the answers

Consider an investment with the following returns: Year 1: $5 ext{%$, Year 2: $-3 ext{%$, Year 3: $4 ext{%$, Year 4: $5 ext{%$. What is the arithmetic annual return for this investment?

$2.75 ext{%}$ Signup and view all the answers

What does HPR stand for in the context of rates of returns?

Holding Period Return Signup and view all the answers

What are the two components of return on any asset?

Income component and capital gains/loss Signup and view all the answers

How is the arithmetic average return calculated for an investment over multiple periods?

$\frac{1}{T} \sum_{t=1}^{T} R_t$ Signup and view all the answers

If an investment has the following returns: Year 1: 5%, Year 2: -3%, Year 3: 4%, Year 4: 5%, what is the arithmetic annual return for this investment?

$2.75%$ Signup and view all the answers

In the context of rates of returns, what formula is used to calculate the Holding Period Return (HPR)?

$HPR = \frac{P_S - P_B + CF}{P_B}$ Signup and view all the answers

Study Notes

Return on Assets

Two components of return on any asset: income and capital appreciation

Holding Period Return (HPR)

HPR stands for Holding Period Return in the context of rates of returns
Formula to calculate HPR: ((Current Price - Initial Price + Dividend) / Initial Price) or ((P1 - P0 + D) / P0)

Arithmetic Average Return

Calculated by averaging the returns over multiple periods
Formula: (Sum of Returns over multiple periods) / Number of periods
Example: If an investment has the following returns: Year 1: 5%, Year 2: -3%, Year 3: 4%, Year 4: 5%, the arithmetic annual return is: (5 + (-3) + 4 + 5) / 4 = 11 / 4 = 2.75%

Example Problem

If the stock price for Stock A was $10 per share 1 year ago, and is currently trading at $9.50 per share with shareholders receiving a $1 dividend, the return earned over the past year is: ((9.50 - 10 + 1) / 10) = 0.50 / 10 = 5%

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Description

Test your knowledge about rates of returns and Holding Period Return (HPR). Understand the components of return on investment and how to calculate HPR using buy and sale prices as well as cash flows.