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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

A share is bought at Rs 500. After one year the investor receives a dividend of Rs 15 per share and the share is sold at Rs 560. The next year, the investor reinvests the entire proceeds from the first year into another share, which falls 10% in price and pays no dividend. What is the two-year holding period return on the original Rs 500 (ignoring tax and costs)?

The two-year return is about 3.5%, so the option of approximately 3.6% is the closest. Year one gives Rs 575 from dividend plus sale, and a 10% fall in year two reduces it to Rs 517.50, a gain of Rs 17.50 on Rs 500.

  1. AApproximately 3.6%Correct
  2. BApproximately 8.0%
  3. CApproximately 15.0%
  4. DApproximately 12.0%

Explanation

Year 1 proceeds = 560 + 15 = Rs 575, a 15% return. In year 2, Rs 575 falls 10% to Rs 517.50. Two-year return = (517.5 - 500) / 500 = 3.5%. The nearest option is approximately 3.6%; simply adding 15% and -10% gives 5%, and 15% is just year 1 alone.

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