Question

You are considering purchasing a stock that currently sells for $50. The expected price of the stock in a year is $45, and during the coming year a $2 dividend is expected to be paid. The risk-free rate is 5% and the market return is 10%. The stock has a beta of 0.85. What is the holding period return of the stock

Answer 1

The holding period return of the stock is - 6 % or - 6.0%

Step-by-step explanation:

Solution

Given that:

You are thinking of purchasing a stock that currently sells for= $50

The expected price of the stock =$45

Dividend expected to be paid =$2

Risk free rate = 5%

Market return = 10%

Stock (beta) = 0.85

We will now find the holding period return of the stock which is given below:

The formula for calculating the holding period return of a stock is given as,

= The Expected price in a year + Dividend earned during the year – Purchase Price / Purchase Price

We recall that:

The Purchase Price = $ 50

Expected price in a year = $ 45

Dividend earned during the year = $ 2

Now,

By Applying the above values in the formula we have the holding period return of the stock as :

= [45 + 2 – 50] / 50

= - 3 / 50

= - 0.0600 = - 6.00 %

= - 6.0 % ( when rounded off to one decimal place )

Therefore, the Holding period return of the stock is - 6 % or - 6.0%