Question

Albert purchased southern industries stock for $40 per share and sold it one and one-half years later for $45 with no dividends being paid. What was Alberts holding period return (HPR). Simple Annualized Return, and Compound Annualized Return, respectively? (A) 8.17%,8.33%,12.50%. (B) 8.33%,12.50%,8.17%. (C) 12.50%,8.33%,8.17%. (D) 12.50%, 8.17%,8.33%.

Answer 1

1. 12.5%

2. 8.33%

3. 8.17%

Step-by-step explanation:

The computation is shown below:

1. Holding period return (HPR):

= (Sale price of stock - purchase price of stock) ÷ (purchase price of stock)

= ($45 - $40) ÷ $40

= $5 ÷ $40

= 12.5%

2. Simple Annualized Return:

= Holding period return (HPR) ÷ (return period)

= 12.5% ÷ 1.5 years

= 8.33%

3. Compound Annualized Return:

Sale price of stock = Purchase price of stock × ( 1 + rate) ^ time period

$45 = $40 × ( 1 + rate) ^ 1.5 years

So, rate = 8.17%