Calculate One-Year Holding Period Return (HPR) for Investment Alternatives
Calculate the one-year holding period return (HPR) for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain.
Investment X:
Cash received: 1st quarter $1.05, 2nd quarter $0.37, 3rd quarter $0.47, 4th quarter $4.02
Investment value: Beginning of year $27.09, End of year $31.65
Investment Y:
Cash received: 1st quarter $1.81, 2nd quarter $1.81, 3rd quarter $1.81, 4th quarter $1.81
Investment value: Beginning of year $48.94, End of year $52.56
Answer:
The HPR for investment X is 38.60% and for investment Y is 22.20%.
To calculate the one-year holding period return (HPR) for each investment, we need to use the following formula:
HPR = [(Ending Value + Dividends) / Beginning Value] - 1
For investment X:
Ending Value: $31.65
Dividends: $1.05 + $0.37 + $0.47 + $4.02 = $5.91
Beginning Value: $27.09
Calculating HPR for investment X:
HPR = [($31.65 + $5.91) / $27.09] - 1
HPR = [$37.56 / $27.09] - 1
HPR = 1.386 - 1
So the HPR for investment X is 38.60%.
For investment Y:
Ending Value: $52.56
Dividends: $1.81 + $1.81 + $1.81 + $1.81 = $7.24
Beginning Value: $48.94
Calculating HPR for investment Y:
HPR = [($52.56 + $7.24) / $48.94] - 1
HPR = [$59.80 / $48.94] - 1
HPR = 1.222 - 1
So the HPR for investment Y is 22.20%.
Comparing the two investments, investment X has a higher HPR than investment Y. Assuming they are of equal risk, I would prefer investment X because it has a higher return.