Question of the Week

Cousin Eddie purchased 250 shares of WES stock for $10,000. One year later, he sold the 250 shares for $10,750. During the time he held the stock, he received a dividend payment of $1.00 per share, inflation was 3% for the year. He asks you to help him determine his total return. Which of the following best describes the calculation that you will use?

a) Capital appreciation of stock plus dividends received, divided by initial investment
b) Capital appreciation of stock less inflation rate, divided by initial investment
c) Capital appreciation of stock plus dividend received less inflation rate, divided by initial investment
d) Capital appreciation of stock plus dividends received, divided by sale amount of investment

Answer: The correct answer is a)

For equity investments, the total return is:

Capital appreciation + dividends received
Initial Investment

In the example, the capital appreciation is $750 ($10,750-$10,000), the dividend received is $250 ($1.00 multiplied by 250 shares), for a total gain of $1,000. You then divide your total gain ($1,000) by the initial investment ($10,000) for a total return of 10%.



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