Nico bought 100 shares of a company's stock for $22.00 per share on January 1, 2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share at the end of 2014
At the end of 2015, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? Explain the difference?
Realized return = = 59.09%
Compound Return:
$22 = $2/ + $3/ + ($4 + 18)/
Solve for r either with a calculator or through trial and error. The calculator is approximately 7.8%.
The reason the realized holding period return is so much larger than the compound rate of return is that the realized return does not account for the time value of money.
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