12.2: Security Return- The Holding Pattern Return (Raw Calculation)
I n order to figure the return o n an asset (a percent) , it is useful to first outline the various components of the return on the asset – and then to calculate the return. The two principal components of return are income and profit, i.e., sales or “exit” price less investment cost . Income is common to many assets including bonds (interest) , stocks (dividends) , and real estate (rent) . The exit price may be equal to, greater or less than the asset’s original investment cost , hence “profit” is included in return .
Example :
- Stock/bond/real estate cost or investment (C) = $1,000. This is an “outflow.”
- Income (I) received over the course of the holding period = $100.
- Sales (exit) price (P) = $1,050.
- The income and sales price are “inflows.”
Holding Period Return (HPR) :
HPR = inflows ÷ outflows -1 = [(I + P) ¸ C] – 1
HPR = [(100 + 1,050) ¸ 1,000] – 1 = + 15%
Alternatively, we could have calculated the HPR by focusing only on the profit ( “ Π ” ), in which case, we would have left out the “-1” expression at the end. The result is the same.
HPR = [(I + Π ) ¸ C]
HPR = [(100 + 50) ¸ 1,000] = + 15%
Note :
While the HPR has severe conceptual limits, it provides key information upon which a better model may be constructed. In this section, we will present the calculation for dollar price and return of a bond.
When you make a sale to your fellow…do not victimize one another.
-Leviticus 25:1
And when you transact a purchase to your friend, or acquire from the hand of your friend, you shall not defraud one another.
-Leviticus 25:14