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CFA Level I · CFA Level I Exam · Sources of Equity Returns

A share is bought at 100.00. After one year it pays a dividend of 4.00, which is immediately reinvested in the shares at 104.00 per share. At the end of year two the share price is 110.00 and no further dividend is paid. The investor held 1 share initially. The total two-year holding period return, including the reinvested dividend, is closest to:

The two-year return is about 14.2%. The 4.00 dividend buys roughly 0.0385 additional shares at 104.00, so 1.0385 shares are worth 114.23 at 110.00 each. That is a gain of 14.23 on 100.00. Simply adding the dividend would give 14.0%.

  1. A14.0%
  2. B14.2%Correct
  3. C18.5%

Explanation

Dividend 4.00 buys 4/104 = 0.038462 shares, so holdings are 1.038462 shares. End value = 1.038462 x 110 = 114.23. Return = 14.23/100 = about 14.2%. Ignoring reinvestment gives (110+4)/100 - 1 = 14.0%.

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