CFA Level I · CFA Level I Exam · Sources of Equity Returns
An investor buys a share at 40.00 and sells it one year later at 44.00. During the year the company pays a cash dividend of 1.20 per share. The investor's total holding period return is closest to:
The total return is about 13.0%. The price return is 4.00 on 40.00, or 10.0%, and the dividend adds 1.20 on 40.00, or 3.0%. Adding the two components gives 13.0%, so ignoring dividends would understate the investor's return.
- A10.0%
- B13.0%Correct
- C15.0%
Explanation
Price return = (44 - 40)/40 = 10.0%. Dividend yield = 1.20/40 = 3.0%. Total return = 13.0%. Choosing 10.0% ignores the dividend; 15.0% has no basis in the data.
Did you get it right without looking?
One question tells you little. A timed set on Sources of Equity Returns shows your real accuracy, how long you take and where you lose marks.
More Sources of Equity Returns questions
- Compared with a historical estimate of the equity risk premium, a forward-looking (supply-side) estimate is most likely to:
- An investor buys a share at $25.00. After six months the share pays a dividend of $1.00, which is immediately reinvested at the then-current…
- An investor buys a share for $40.00, receives dividends of $1.20 during the year, and sells the share for $42.00 at year-end. The investor's…
- A share's price rises from €50.00 to €53.00 over a year, and the share pays quarterly dividends of €0.50. Dividends are not reinvested. The …
- A company announces a 2-for-1 stock split. Holding all else equal, the split most likely changes an existing shareholder's total return from…
- An analyst argues that the contribution of P/E expansion to equity returns is least likely to be sustainable over long horizons. The most ap…