Series 65

AAA

Quantitative Methods of Evaluating Businesses and Investments - Holding Period Return

The return realized by an investor during a real or expected period of time, holding period return is calculated as income plus price appreciation during a specific time period, divided by the investment's cost.


Holding Period Return = (P1 + D - P0) / P0


P1 = Ending Value of Investment
P0 = Beginning Value of Investment
D = Dividend or Cash Flow

Example: Three years ago, Sally Jones paid $12.25 a share for 100 shares of First Trust Financial Services Corp. During that time, she has received 12 equal quarterly dividend payments of 8 cents a share. Today, the stock is worth $19 a share. What is Sally's holding period return for the investment?

Holding period return = (19 + .96 - 12.25) / 12.25 = .63 or 63%

In a long position, holding period refers to the time between an asset's purchase and its sale. In a short sale, the holding period is the time between when a short seller initially borrows an asset from a brokerage and when he or she sells it back. In other words, the length of time for which the short position is held.

An investment's holding period is used for a number of different functions, including evaluating an investment's performance, calculating loss or gain from the investment and determining whether an investment is worthwhile. The holding period of an investment is also used to determine how the capital gain or loss should be taxed because long-term investments tend to be taxed at a lower rate than short-term investments.

Introduction
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