Holding Period Return

Posted Date  26/05/2017

The holding period rate of return (for short, the holding period return) is the return earned from investing in an asset over a specified time period. The specified time period is the holding period under examination, whether it is one day, two weeks, four years, or any other length of time. To use a hypothetical return figure of 0.8 percent for a one-day holding period, we would say that “the one-day holding period return is 0.8 percent” (or equivalently, “the one-day return is 0.8 percent” or “the return is 0.8 percent over one day”). Such returns can be separated into investment income and price appreciation components. If the asset is a share purchased now (at t = 0, with t denoting time) and sold at t = H, the holding period is t = 0 to t = H and the holding period return is

r =DH+PHP0-1   =DHP0+PH-P0P0   =Dividend Yield+Price appreciation return

where Dt and Pt are per-share dividends and share price at time t. Equation 1 shows that the holding period return is the sum of two components: dividend yield (DH/P0) and price appreciation return ([PH − P0]/P0), also known as the capital gains yield.

Equation 1 assumes, for simplicity, that any dividend is received at the end of the holding period. More generally, the holding period return would be calculated based on reinvesting any dividend received between t = 0 and t = H in additional shares on the date the dividend was received at the price then available. Holding period returns are sometimes annualized—e.g., the return for a specific holding period may be converted to an annualized return, usually based on compounding at the holding period rate. For example, (1.008)365 – 1 = 17.3271 or 1,732.71 percent, is one way to annualize a one-day 0.80 percent return.

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