Question

Penny sold 400 shares of RBC for $78, that she paid $82 for 4 years earlier.

She received $1 .30 of dividends per share each year.

calculate simple and compound holding period returns.

Answer 1

Number of shares = 400

Purchase price = 82*400 = 32,800

Selling price = 78*400 = 31,200

Income received over 4 years = total dividends*number of years = (1.30*400)*4 = 2,080

Holding period return = (Income + selling price - purchase price)/purchase price

= (2,080+31,200-32,800)/32,800 = 1.46%

Simple interest return = 1.46%/4 = 0.366%

Check: Beginning value = 32,800

Ending value = 31,200+2,080 = 33,280

Using simple interest formula, we should get the same ending value if our calculation is correct.

Ending value = beginning value*(1+holding period*interest rate)

= 32,800*(1+4*0.366%) = 33,280 (It matches the ending value so simple interest return is correct)

Compound interest return = (1+holding period return)^(1/holding period) -1

= (1+1.46%)^(1/4) -1 = 0.364%

Check: Using compound interest formula,

ending value = beginning value*(1+interest rate)^(holding period)

= 32,800*(1+0.364%)^4 = 33,280