An investment’s return measures the reward earned for putting money at risk. This lesson explains how to calculate the realized return on an individual asset, including both dividends and changes in market price, and how to compare returns earned over different time periods.
The realized return is the total return that actually occurs over a particular holding period. For a stock, an investor may receive income in the form of dividends and gain or lose value as the stock price changes.
All flashcards
Realized return
The total return that actually occurs over a specified holding period, including income and any change in the asset’s value.
Capital gain
An increase in an asset’s price. The price change is found by subtracting the initial price from the ending price.
Holding-period return
The percentage return earned over the entire period an investment is held, whether that period is shorter or longer than one year.
Geometric average return
The constant compounded per-period return that would produce the same overall growth as a sequence of returns.
Firm-specific risk
Uncertainty arising from events or information that affect an individual company or a limited set of companies.
Quiz questions
A share is bought for $50, sold for $56, and pays $1 in dividends. What is its total dollar return?Answer: $7.
An investment earns 10% over a three-month holding period. Which expression gives its effective annual rate?Answer: (1+0.10)4−1
What does the arithmetic average return describe?Answer: The average return in a single period within the historical sample.
When are arithmetic and geometric average returns equal?Answer: When the return is identical in every period.
Which event is an example of firm-specific risk?Answer: A product recall that affects one company’s expected costs and sales.
Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.