Holding Period Return
What is the holding period return?
Holding period return – The holding period return is the return an investor receives, in percentage form, from a stock or portfolio over a specified time frame. The timeframe normally used for investors is one year. However, the time span may be as short as a quarter or as long as five or 10 years. To calculate the holding period return the formula is as follows: ( End Price – Start Price + Cash Flow) / Start price. In the formula, the end price is usually the sales price of the stock or portfolio. The cash flow is normally dividends paid. Finally, the start price is a purchase price of the stock or bond.
Why is the Holding Period Return Important?
Understanding the holding period return is a critical concept for investors and finance students. The holding period return allows investors to understand the rate of return on a portfolio or stock in percentage terms. Next, when investors calculate the holding period return for numerous investments, the investors will be able to compare which investment has a highest return for their portfolio. Finally, understanding the holding period return allows students to customize the formula to other financial calculations. For example, the holding period return may be broken up into dividend yield return formulas and capital gains formulas.
Who needs to understand the holding period return?
The holding period return formula should be understood by numerous entities. First, investors should understand the holding period return because of the formula’s ability to calculate return on a stock, bond or portfolio. This will allow the investor to compare various investment options to determine the best course of investment. Finance students need to understand the holding period return because this concept is covered in numerous classes such as corporate finance, introduction the finance, healthcare finance, international finance, and investments. Finally, managerial students should have a working knowledge of the holding period return formula because of the numerous accounting and finance concepts using this particular formula.
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What Is Holding Period Return?
Holding Period Return Terminology:
The components needed to calculate the holding period return are the purchase price, sales price, and any payments received from the investment.
- P1 - The P1 stand for the end price or the price the stock or portfolio was sold for.
- Cash flow - cash flow is usually the dividend payment paid by stock or cash flow from a bond or portfolio.
- P0- The P0 is the purchase price of the stock or portfolio.
Using Holding Period Return.
To use this formula, the sales price is subtracted from the purchase price. Further, any cash payments received from this investment is added into the difference between the sales price and purchase price. This constitutes the numerator for the formula. Next, the numerator is divided by the purchase price. From this, the holding period return is found.