Question

Consider a stock with a beginning of the year price of 21. The stock's dividends and quarterly stock price are as follows:

Quarter		Dividend		End of period stock price.
1		1		23
2		2		22
3		1		22
4		1		22

The effective annual yield on this stock is ____________.

Answer 1

Quarter 1:

Rate of Return, r1 = (Ending Price + Dividend - Beginning Price) / Beginning Price
Rate of Return, r1 = ($23 + $1 - $21) / $21
Rate of Return, r1 = 0.1429

Quarter 2:

Rate of Return, r2 = (Ending Price + Dividend - Beginning Price) / Beginning Price
Rate of Return, r2 = ($22 + $2 - $23) / $23
Rate of Return, r2 = 0.0435

Quarter 3:

Rate of Return, r3 = (Ending Price + Dividend - Beginning Price) / Beginning Price
Rate of Return, r3 = ($22 + $1 - $22) / $22
Rate of Return, r3 = 0.0455

Quarter 4:

Rate of Return, r4 = (Ending Price + Dividend - Beginning Price) / Beginning Price
Rate of Return, r4 = ($22 + $1 - $22) / $22
Rate of Return, r4 = 0.0455

Effective Annual Yield = [(1 + r1) * (1 + r2) * (1 + r3) * (1 + r4)] - 1
Effective Annual Yield = [(1 + 0.1429) * (1 + 0.0435) * (1 + 0.0455) * (1 + 0.0455)] - 1
Effective Annual Yield = 1.3036 - 1
Effective Annual Yield = 0.3036 or 30.36%