Question

Assume one of the stocks in your portfolio is Ecobank Ghana. Let’s assume that you bought 10,000 of these shares at the time of the Initial Public Offering (IPO) for GHȼ1.1 per share. Let’s also assume that Ecobank pays a dividend of GHȼ 0.20 per share every year over the investment period. At the end of four years, the stock price has increased to GHȼ4.00. Compute the following;

(a) The cedi return on the investment.
(b) The holding period return.
(c) The annualized return.

Answer 1

:(a) The cedi return on the investment is GHȼ2,890, calculated as [(GHȼ4.00 - GHȼ1.1) + GHȼ0.20] * 10,000 * 4.

(b) The holding period return is 281.82%, computed as [(GHȼ4.00 + GHȼ0.20) / GHȼ1.1 - 1] * 100.

(c) The annualized return is approximately 49.95%, derived from [(1 + 281.82%)^(1/4) - 1] * 100.

Step-by-step explanation:

Investing in Ecobank Ghana has yielded a cedi return of GHȼ2,890 over four years. This is calculated by considering the increase in stock price (GHȼ4.00 - GHȼ1.1) plus the annual dividend (GHȼ0.20) and multiplying it by the initial number of shares (10,000) and the investment period (4 years).

The holding period return, indicating the total return over the investment period, is determined as 281.82%. This is calculated by taking the ratio of the final value of the investment to the initial investment, subtracting 1, and multiplying by 100 to express it as a percentage.

The annualized return, which provides a comparable annual rate of return, is approximately 49.95%. It is computed by taking the fourth root of the holding period return, adding 1, subtracting 1, and multiplying by 100. This allows for a standardized measure of the investment's performance on an annual basis, smoothing out the effect of compounding over time.