Question

A stock had the following year-end prices and dividends: year price dividend 0 $59.83 — 1 70.9 $1.23 2 62.5 1.51 3 72.18 1.58 what was the arithmetic average return for the stock?

Answer 1

The arithmetic average return for the stock over the three-year period is 9.93%, calculated by taking the individual annual returns, summing them, and dividing by the number of years.

Step-by-step explanation:

Calculating the Arithmetic Average Return of a Stock

To calculate the arithmetic average return for a stock, you consider the sum of the stock's annual returns and divide by the number of years. The annual return includes both the capital gains and the dividends received. The annual return for each year is calculated as follows:

• Year 1: ((70.9 - 59.83) + 1.23) / 59.83 = 0.2140 or 21.40%
• Year 2: ((62.5 - 70.9) + 1.51) / 70.9 = -0.0974 or -9.74%
• Year 3: ((72.18 - 62.5) + 1.58) / 62.5 = 0.1813 or 18.13%

The arithmetic average return across these three years is therefore: (21.40 - 9.74 + 18.13) / 3 = 9.93%