CFA Level I · CFA Level I Exam · Sources of Equity Returns
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 total return for the year is closest to:
The total return is about 8.0%. The price rise from $40 to $42 gives a 5.0% price return, and the $1.20 dividend adds a 3.0% dividend yield. Adding the two components gives 8.0%. Looking at price change alone would miss the income part.
- A5.0%
- B8.0%Correct
- C10.0%
Explanation
Price return = (42 - 40)/40 = 5.0%. Dividend yield = 1.20/40 = 3.0%. Total return = 5.0% + 3.0% = 8.0%. Choosing 5.0% ignores dividends, while 10.0% would overstate the return.
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