How do I calculate the return on an investment for a given period?
Fsp Invest, 07 Jan. 2014
Tags: holding period return, hpr, return on investment, how to work out return on investment, how to work out holding period return, what is holding period return, investment return
When you enter into an investment with a set interest rate, you know what the return on that investment will be over the holding period. But what if you hold assets such as property shares, commodities or works of art, which don’t carry a promised rate of return? Well, you can work out the return using a simple concept— called the ‘holding period return’ (HPR). Let’s take a closer look at it….
The holding rate return on your investment can come from two sources:
1. Price or capital appreciation (or depreciation, if you’re unlucky). This is any gain or loss in the market price of the asset.
2. Cash flow (if any) generated by the asset. This could be dividend payouts to shareholders or rental income from property. Not all assets produce cash flows.
The holding period return is the total return on an asset or portfolio of assets over the period you held them. It doesn’t take into account reinvestment income.
Here’s an example to help you understand the concept.
How to determine your investment’s holding rate return
Let’s say you buy a share for R50. At the end of the year, the share pays a R2.50 dividend and its price is R55.
In this case, the holding period was one year.
To calculate the HPR, you can use the following formula:
HPR= capital gain(or loss) + cashflow
= ((55-50/50)+(2.50/50)) x 100%
=15.0% gain in 12 months.
You would express the HPR as a percentage.
Use HPR when you want to work out how much money your investment made you while you held it. It’s a great way to know whether to hold onto an asset or let it go.
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