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CFA Level I Exam · Equity Instrument Features

Return Characteristics of Equity Securities Explained

Updated 7 October 2026 · Fact-checked

Equity return has two parts: price change (capital gain or loss) and dividend income. Total return = (P1 − P0 + D) ÷ P0. For a foreign stock, convert to your home currency: (1 + local return) × (1 + currency change) − 1. Check which currency the question wants.

Understand Return Characteristics of Equity Securities

When you buy a share, you can earn money in two ways. The price can rise or fall. The company can also pay you dividends. Together these make the total return.

Price return (also called capital gain or loss) is the change in price divided by the starting price. Dividend yield is the dividend divided by the starting price. Add the two and you get the holding period return for equity: (P1 − P0) ÷ P0 + D ÷ P0.

Dividends are not guaranteed. A company decides whether to pay them. Many growth companies pay little or nothing and keep the cash to reinvest. So for some stocks almost all return comes from price change. If you reinvest dividends, the total return is higher than if you spend them, because the reinvested cash earns its own return.

Now add currency. Suppose you are a EUR-based investor who buys a US stock priced in USD. You earn the stock's return in USD. But you then convert back to EUR. If USD weakens against EUR, your EUR return falls. If USD strengthens, it rises. The domestic-currency return combines both effects by multiplying the growth factors.

For the exam, watch two things: the currency of the return the question asks for, and the quote direction of the exchange rate. Most errors come from these, not from the arithmetic.

Key formulas to remember

Price return
Price return = (P1 − P0) ÷ P0
P0 is the purchase price, P1 is the ending price. Excludes dividends.
Dividend yield
Dividend yield = D ÷ P0
Uses the starting price, not the ending price, when measuring return.
Total return (single period)
Total return = (P1 − P0 + D) ÷ P0 = price return + dividend yield
Assumes the dividend is received during or at the end of the period and not reinvested.
Domestic-currency return
R(domestic) = (1 + R(local)) × (1 + R(currency)) − 1
R(currency) is the percentage change in the foreign currency's value in your home currency.
Approximate domestic return
R(domestic) ≈ R(local) + R(currency)
Ignores the cross term. Use only if the options are far apart. The exact formula is safer.
Currency change from a direct quote
Change in foreign currency value = S1 ÷ S0 − 1
Only when S is quoted as home currency per 1 unit of foreign currency. If quoted the other way, use S0 ÷ S1 − 1.

How to solve Return Characteristics of Equity Securities questions

Use this order for any question on equity return components or currency effects.

  1. 1Identify the return asked for: price return, total return, or return in the investor's home currency.
  2. 2List the data: starting price, ending price, dividends received, and any exchange rates.
  3. 3Compute the price return: (P1 − P0) ÷ P0.
  4. 4Compute the dividend yield: D ÷ P0, using the starting price.
  5. 5Add them to get the total return in local currency.
  6. 6If a home-currency answer is needed, find the currency change as home currency per foreign unit, then compute (1 + local) × (1 + currency change) − 1.
  7. 7Check the sign and size. A weaker foreign currency lowers the home-currency return.
  8. 8Compare your answer with the three options and pick the closest exact match.

Quickest way: Growth-factor shortcut

When to use it: Use it when a question gives prices and exchange rates and asks for a home-currency return.

  1. Compute the local growth factor: (P1 + D) ÷ P0.
  2. Compute the currency growth factor: ending rate ÷ starting rate, with the rate quoted as home per foreign.
  3. Multiply the two factors and subtract 1.
  4. On the BA II Plus, key the first factor, press ×, key the second factor, press =, then − 1 =.
  5. Eliminate options that have the wrong sign or that simply add the two returns if the cross term changes the answer.

Common mistakes in Return Characteristics of Equity Securities

  • Dividing the dividend by the ending price to get dividend yield for return purposes.

    Quoted dividend yields on screens often use the current price.

    Fix: For a holding period return, always divide by the starting price P0.

  • Leaving dividends out of the return.

    Students focus on the price change because it is the obvious number.

    Fix: Re-read the stem for any dividend, then include it in the numerator.

  • Adding local return and currency change without the cross term when options are close.

    The approximation is quick and works roughly.

    Fix: Use (1 + R local) × (1 + R currency) − 1 as your default. It is exact.

  • Using the wrong direction of the exchange rate.

    Quotes like EUR/USD and USD/EUR look similar.

    Fix: Write the quote as home currency per 1 foreign unit first. If it rose, the foreign currency strengthened.

  • Assuming a stronger home currency helps the foreign investment.

    Strong sounds good.

    Fix: A stronger home currency means the foreign currency buys less home currency, so the home-currency return falls.

Worked examples

Example 1

A share is bought at USD 80.00. One year later it trades at USD 88.00 and it paid a dividend of USD 2.00 during the year. What is the total return in USD? (A) 10.0% (B) 12.5% (C) 15.0%

Show the solution
  1. Price return = (88 − 80) ÷ 80 = 8 ÷ 80 = 10.0%.
  2. Dividend yield = 2 ÷ 80 = 2.5%.
  3. Total return = 10.0% + 2.5% = 12.5%.
  4. Option A is price return only. Option C is not supported by any step.

Answer: B (12.5%)

Example 2

A EUR-based investor buys a US share for USD 50.00. One year later it is worth USD 55.00 and paid no dividend. The exchange rate moves from EUR 0.90 per USD to EUR 0.81 per USD. What is the investor's return in EUR? (A) −1.0% (B) 0.0% (C) 10.0%

Show the solution
  1. Local return = (55 − 50) ÷ 50 = 10.0%, so the growth factor is 1.10.
  2. The rate is quoted as EUR per USD, which is home per foreign, so it can be used directly.
  3. Currency change = 0.81 ÷ 0.90 − 1 = −10.0%, so the factor is 0.90.
  4. Domestic return = 1.10 × 0.90 − 1 = 0.99 − 1 = −1.0%.
  5. The approximation 10% − 10% = 0% would give B. That is the trap.

Answer: A (−1.0%)

Exam tips

  • Check the currency of the answer first. Many items give a local return and ask for a home-currency return.
  • Options are listed smallest to largest. If two options differ by about one percentage point, the cross term probably decides the answer.
  • Remember the dividend yield uses P0. Option distractors often use P1.
  • A price return option and a total return option usually both appear. Confirm whether dividends were paid.
  • Write the quote as home per foreign before doing any currency math.

Practice questions from Equity Instrument Features

Return Characteristics of Equity Securities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Return Characteristics of Equity Securities: frequently asked questions

What are the components of equity return?

Equity return comes from price change and dividend income. Together they make the total return. If dividends are reinvested, the return on those reinvested dividends also adds to the result.

How do you calculate total return on a stock?

Add the dividends received to the change in price, then divide by the starting price. That is (P1 − P0 + D) ÷ P0. It equals price return plus dividend yield.

How does currency affect the return on a foreign equity?

The investor earns the local return, then converts back to the home currency. If the foreign currency weakens against the home currency, the home-currency return falls. If it strengthens, the return rises.

Can I just add the local return and the currency return?

That gives an approximation. The exact method multiplies the growth factors and subtracts 1. On exam questions the difference can decide which option is correct, so use the exact method.