CFA Level I · CFA Level I Exam · Equity Instrument Features
A stock is bought at 50.00. After one year it pays a dividend of 2.00 and trades at 56.00. After a second year it pays a dividend of 2.50 and trades at 52.00. Assuming dividends are not reinvested, the holding period return over the two years is closest to:
The two-year holding period return is about 13.0%. Dividends of 4.50 plus a net price gain of 2.00 equal 6.50 on a 50.00 purchase price. Using the intermediate price of 56.00 as though it were realized would overstate the return, because the shares ended at 52.00.
- A8.0%
- B13.0%Correct
- C17.0%
Explanation
Total dividends are 2.00 + 2.50 = 4.50 and the price change is 52.00 - 50.00 = 2.00, so total gain is 6.50. Divided by 50.00 gives 13.0%. The 8.0% option uses only year-two data or ignores dividends partially; the 17.0% option wrongly uses the year-one ending price of 56.00 as a gain on top of dividends.
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