Question

Horace bought 10,000 shares of LaLa at $40 per share. Two years later he sold the stock for $80 per share. LaLa declared and paid a dividend of $4 per share during the period Horace held the stock. What was Horace’s holding period return?

A. 10%.
B. 100%.
C. 110%.
D. 210%.

Answer 1

Horace's holding period return is 110%. Option (C) is correct.

Step-by-step explanation:

Holding period return is the total return received from holding an asset or portfolio of assets over some time, known as the holding period. It is generally expressed as a percentage and is particularly useful for comparing returns on investments purchased at different periods in time.

They are determined by simply by adding the investment's income and the difference between its end-of-period value (P1) and initial value (P0), and then dividing this sum by the end-of-period value (P0).

To calculate Horace's holding period return, we need to consider the dividends and the change in stock price.

Horace bought 10,000 shares at $40 per share, so his initial investment is $40 * 10,000 = $400,000.

The total dividend received is $4 * 10,000 = $40,000.

Horace sold the stock for $80 per share, so he received $80 * 10,000 = $800,000.

The total return is the sum of the dividends and the change in stock price, which is ($40,000 + ($800,000 - $400,000)) / $400,000. Simplifying this gives us ($40,000 + $400,000) / $400,000 = 1.1.

To convert this to a percentage, we multiply by 100, so Horace's holding period return is 1.1 * 100 = 110%.

Therefore, the correct answer is option C. 110%.