Question

the price of a stock is $45 at the beginning of the year and $50 at the end of the year. of the stock paid a $1 dividend and inflation was 3%, what is the real holding-period return for the year?

Answer 1

Answer:

Real holding period return on investment =10.03%

Explanation:

Total return is the sum of capital appreciation plus the distribution received over the course of the investment period.

Capital gain is the difference between the current value of the investment and the initial cost of the investment

Total return = capital gain + distributed dividends

Capital gain= 50-45= 5

Dividend = 1

Percentage return =( total return/ cost of investment ) × 100

Total return = 5+1= 6

Total return = 6/45 × 100= 13.333

Inflation is the increase in the price level.It erodes the value of money.rise in the price of money  

Nominal interest is that quoted for investment or loan transactions. It has not been been adjusted for inflation.  

Real interest rate is the amount of interest in terms of the the quantity of good and services that can be purchased. It is the nominal interest rate adjusted for inflation.  

The relationship between inflation, real interest and nominal interest rate is given using the Fishers Effect;  

N = ( (1+R) × (1+F)) - 1  

N- nominal rate, R-real rate, F- inflation  

real  rate of return = (I.13/1.03) -1 = 0.1003

Nominal rate of return =  0.1003 × 100 = 10.032%