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Holding Period Return (HPR)

 

Holding Period Return (HPR)

Holding Period Return (HPR) is a measure of the total return on an investment over a specific period of time, regardless of whether the investment is held for a short or long duration. It takes into account both income earned from the investment (such as dividends or interest) and capital gains or losses due to price changes during the holding period.

HPR is particularly useful for assessing the performance of an investment over a discrete time period, like a year, month, or any other specified time frame. It’s often used in investment analysis to compare the performance of different assets, portfolios, or investment strategies.

 


Formula for Holding Period Return (HPR)

The basic formula for calculating the Holding Period Return (HPR) is:

 

HPR=Final PriceOriginal Price+IncomeOriginal Price\text{HPR} = \frac{\text{Ending Value} – \text{Beginning Value} + \text{Income}}{\text{Beginning Value}}

 

Where:

  • Final Price: The final price of the investment at the end of the holding period.
  • Original Price: The initial value of the investment at the start of the holding period.
  • Income: Any income received during the holding period (such as dividends, interest, or other distributions).

 


Understanding the Components
  • Original Price: This is the price at which the asset or security is initially purchased. For example, if you buy a stock at $100 per share, the beginning value is $100.
  • Final Price: This is the price of the investment at the end of the holding period. For instance, if the stock price has risen to $120 by the end of the year, the ending value would be $120.
  • Income: This includes any dividends, interest, or other distributions received during the holding period. For example, if the stock paid $5 in dividends over the year, this income would be added to the formula.

 


Examples of Holding Period Return (HPR)

Example 1: Stock Investment with Dividends

Suppose an investor buys 100 shares of a stock for $50 per share at the beginning of the year. During the year, the stock pays $2 per share in dividends, and by the end of the year, the stock price rises to $60 per share.

  • Beginning Value = $50 × 100 shares = $5,000
  • Ending Value = $60 × 100 shares = $6,000
  • Income = $2 × 100 shares = $200 (dividends received)

Now, plug the values into the HPR formula:

 

HPR=6,0005,000+2005,000=1,2005,000=0.24 or 24%\text{HPR} = \frac{6,000 – 5,000 + 200}{5,000} = \frac{1,200}{5,000} = 0.24 \text{ or } 24\%

 

In this case, the Holding Period Return is 24%, meaning the investor achieved a 24% return on the investment over the year, considering both capital appreciation and dividends.

 

Example 2: Bond Investment with Interest

Let’s assume an investor purchases a bond for $1,000. Over the next year, the bond pays $50 in interest (coupon payment), and the price of the bond rises to $1,050.

  • Beginning Value = $1,000
  • Ending Value = $1,050
  • Income = $50 (interest received)

Now, apply the HPR formula:

 

HPR=1,0501,000+501,000=1001,000=0.10 or 10%\text{HPR} = \frac{1,050 – 1,000 + 50}{1,000} = \frac{100}{1,000} = 0.10 \text{ or } 10\%

 

In this case, the Holding Period Return is 10%.

 


Significance and Uses of Holding Period Return

The Holding Period Return is widely used for several reasons:

  • Performance Evaluation: HPR helps investors assess how well their investments have performed over a given period, taking into account both price appreciation and income received.
  • Comparison of Investments: Since HPR can be calculated for various types of investments (stocks, bonds, real estate, etc.), it allows for a direct comparison between different assets or portfolios to evaluate which has provided the better return over the same period.
  • Risk-Adjusted Comparison: HPR can be used in conjunction with risk measures (like standard deviation or beta) to evaluate returns relative to the level of risk taken. This helps investors in decision-making by comparing not only returns but also the associated risks.
  • Annualizing the Return: While HPR calculates the return for a specific holding period, it can be annualized to allow comparison between investments held for different lengths of time. This is particularly useful if investments are held for periods shorter or longer than one year.

 


Annualizing Holding Period Return (for non-annual periods)

When an investment is held for less than or more than a year, it is common to annualize the holding period return to make it comparable to annualized returns from other investments. The annualization process adjusts the return to reflect a full year, assuming the investment’s performance over the holding period would continue at the same rate.

To annualize a return, you can use the following formula:

 

Annualized HPR=(1+HPR)1n1\text{Annualized HPR} = \left(1 + \text{HPR}\right)^{\frac{1}{n}} – 1

 

Where:

  • HPR is the holding period return for the investment.
  • n is the number of years (or fractions of a year) the investment was held.

 

Example: Annualizing a Six-Month Return

Let’s say an investor has a holding period return of 10% for an investment held for 6 months. To annualize the return, use the formula:

 

Annualized HPR=(1+0.10)10.51=1.1021=1.211=0.21 or 21%\text{Annualized HPR} = (1 + 0.10)^{\frac{1}{0.5}} – 1 = 1.10^2 – 1 = 1.21 – 1 = 0.21 \text{ or } 21\%

 

In this example, the annualized holding period return is 21%, assuming the same performance would continue for the full year.

 


Limitations of Holding Period Return

While HPR is a useful measure, it has some limitations:

  • Does Not Account for Compounding: If the investment involves reinvestment of income (such as dividends or interest), HPR does not account for the compounding effect unless the income is reinvested during the holding period.
  • Non-Standardized Time Frame: Since the holding period can vary significantly (from days to years), HPR doesn’t provide a standardized way to compare investments over different time periods unless the return is annualized.
  • Does Not Factor in Risk: HPR focuses on the return of an investment but does not directly measure the risk taken to achieve that return. It can be misleading when comparing investments with different risk profiles.
  • Excludes Transaction Costs: The formula assumes no transaction costs (such as brokerage fees), taxes, or other expenses, which could affect the net return.

 


Real-World Application of HPR

HPR is often used in the following scenarios:

  • Equity and Fixed Income Investment Performance: Investors and portfolio managers use HPR to assess the return on stocks, bonds, or mutual funds over a specific period, including dividends, interest, and capital gains.
  • Real Estate Investments: HPR can be used to calculate the total return on real estate investments, considering both rental income and changes in property value.
  • Private Equity: HPR is often applied to investments in private equity, where investors want to evaluate the overall return over the period they held the investment, factoring in distributions and changes in value.

 


Conclusion

The Holding Period Return (HPR) is an essential metric for measuring the total return of an investment over a specific period. By including both income and capital gains or losses, HPR provides a comprehensive picture of an investment’s performance. While HPR is a simple and effective tool for performance assessment, investors should be aware of its limitations, including its lack of consideration for compounding, risk, and transaction costs. Annualizing the return can make it more comparable to other investments held over different periods. HPR remains a fundamental calculation for comparing the performance of various assets and for evaluating the success of investment strategies.

 


Formula

 

$$\begin{aligned} HPR\; &= \left [ Final\;Price\;-\;Original\;Price\;+\;Income \over Original\;Price \right ] \\\\ &= \;\left [ Capital\;Gain\;+\;Dividends \over Original\;Price \right ] \end{aligned}$$

 


Holding Period Return (HPR)

 

Holding Period Return (HPR): %

 

Compound Interest

 

Market Capitalisation

Franking (Imputation) Credits

 

Notes

As dividends are paid after a company has paid it’s company tax, the dividend may contain a franking (imputation) credit.

If the dividend is fully franked (100%) investors are entitled to receive the full credit of the tax paid on the dividend as franking (imputation) credits.

Depending on an investors’ individual circumstances, franking credits may be used to decrease the income tax payable by the investor or potentially be received by the investor as a tax refund.

 


Formula

$$  Franking\;Credit = Franked\;Dividend \times \left (Company\;Tax\;Rate \over 1-Company\;Tax\;Rate \right ) $$

 


Calculator

 

 

 


See also: Dividends

Standard Orders


Amount Type

  • Quantity
  • Value

 


Order Types

There are primarily two types of orders placed on the market.

  1. Market Orders
  2. Limit Orders

 


Market Orders

  • Executes at the best available price on the market.
  • Focuses on speed of execution.
  • May convert to a limit order in the event that insufficient quantity exists at market price.

 


Market to Limit Orders

  • The order starts filling at market price. In the event that there is insufficient quantity available at market price, the order may convert to a limit order and remain in the market until fulfilled at that price.

 


Limit Orders

  • Executes at the price specified.

 


Price per Unit ($)

  • Only applicable to limit orders
  • Price you wish to buy or sell each unit.

 


Duration

  • Good For Day: The order will remain in the market until market closure on the day.
  • Good Till Cancelled: The order will remain in the market until such time as it is cancelled.
  • Good Till Date: The order will remain in the market until market closure of the specified date.

Dividends

 

Notes

A payment paid regularly by a company to its shareholders out of its profits (or reserves). Interim dividends are generally paid out of surplus profits (reserved) of the previous years, whereas final dividends are declared and paid out on an annual basis after the earnings are known for that financial year. Additionally, companies may pay a bonus dividend.

 

  • Interim Dividend
  • Bonus Dividend
  • Final Dividend

 

A company typically divides its profits between itself and its shareholders. Distributions represent a portion of the profits a company decides to give to its shareholders, while retained earnings represent the portion of profits that a company chooses to keep. Companies choose to share profits in the form of dividends because it encourages shareholders to continue investing in the company. Understanding the transactions pertaining to dividends and retained earnings helps you know the effects of the transactions on a company’s financial statements.

 

 


 

Ex-Dividend Date

The ex-dividend date occurs one business day before the company’s Record Date.

Important: To be entitled to the dividend, the buyer needs to purchase the shares prior to the ex-dividend date! If you purchase shares on the ex-dividend date, the seller will be entitled to the dividend payment.

 


 

Record Date

The record date is 5.00pm on the date a company closes its share register to determine which shareholders are entitled to receive the current dividend. It is the date where all changes to registration details must be finalised.

 


 

Dividend Entitlement

 

 


 

Formula

 

$$\begin{aligned} Dividend\;Yield\; &=\;\left [ (Interim\;Dividend + Final\;Dividend) \over Current\;Share\;Price\right ] \;*\;100\;\\\\\ &= \;\left [ Dividends \over Current\;Share\;Price \right ] \;*\;100\;\end{aligned}$$

 


Dividend Yield

 

* Interim dividend per share (i.e. 25 cents per share = 0.25).
* Final dividend per share (i.e. 30 cents per share = 0.30).
Dividend Yield: %

 


See also: Franking (Imputation) Credits

Online Trading Platforms

 

 

Useful Links

 

IndexUseful Links
1ABC - Australian Broadcasting Corporation
2ABN Lookup
3ABS - Australian Bureau of Statistics
4ABS – Australian Bureau of Statistics (Life Tables)
5AFR - Australian Financial Review
6Al Jazeera
7American Action Forum
8AMP - Australian Mutual Provident Society
9Apollo Global Management
10Argo Blockchain
11ARK Invest
12ASIC - Australian Securities & Investments Commission
13ASIC - MoneySmart
14ASX - Australian Securities Exchange
15ATO - Australian Taxation Office
16AUSTRAC - Australian Transaction Reports and Analysis Centre
17Australian Government - Australian Office of Financial Management
18Australian Government - Bonds
19Australian Government - data.gov.au
20Australian Government - Foreign Investment Review Board (FIRB)
21Australian Government - Office of the Australian Information Commissioner (OAIC)
22Australian Government - Takeovers Panel
23Australian Government - The Treasury
24Australian Stock Report
25Bank of International Settlements
26Barron's
27BBC - British Broadcasting Corporation
28Bianco Research
29Bitmain
30BlackRock
31Blackstone
32Blockchain.com
33Bloomberg
34Brand Finance
35Bridgewater Associates
36BTC Markets
37Bullseye Option
38Business Insider
39Canstar
40Canyon Capital Advisors
41Capital Link
42CBOE - Chicago Board Options Exchange
43CBS - Columbia Broadcasting System
44CFA Institute
45CGTN - China Global Television Network
46Charles Schwab
47China Beige Book
48CitiFirst
49CMB International
50CME Group
51CNA - Channel News Asia
52CNBC - Consumer News and Business Channel
53CNN - Cable News Network
54Council for Inclusive Capitalism
55CoinDesk
56CoinGecko
57CoinMarketCap
58Committee for a Responsible Federal Budget
59Connor Broadley
60Corporate Finance Institute
61crypto.com
62CryptoCompare
63CryptoSlate
64DappRadar
65Decentral
66DeListed Australia
67Evercore
68FactSet
69Fibonacci Asset Management
70Fidelity International
71FMP - Financial Modeling Prep
72FNArena
73Forager Funds Management
74Forbes
75Foundry
76Fox News
77Franklin Templeton
78FT - Financial Times
79Gemini
80Global Source Partners
81Gramercy
82High Pay Centre
83HotCopper
84ICE - Intercontinental Exchange
85InfoChoice
86International Monetary Fund (IMF)
87International Swaps and Derivatives Association (ISDA)
88Investing.com
89Investment Week
90Investopedia
91InvestorHub
92ISO - International Organization for Standardization
93Jane Street
94John Hancock Investment Management
95Kingswood
96Knight Frank - The Wealth Report
97ListCorp
98LSEG - London Stock Exchange Group of Companies (formerly Refinitiv)
99Mainstay Capital Markets Consultants
100Market Index
101MarketGauge
102MarketWatch
103Mashreq Capital
104Mercer
105Morningstar
106MSCI - Morgan Stanley Capital International
107NF Trinity
108Niles Investment Management
109Ninety One
110Nouriel Roubini
111Oaktree Capital
112OECD - The Organisation for Economic Co-operation and Development
113Office for National Statistics (UK)
114Optimize Advisors
115Our World in Data
116Pantera Capital
117Pepperstone
118PIIE - Peterson Institute for International Economics
119PIMCO
120PineBridge Investments
121Prestige Economics
122RBC Capital Markets
123Renaissance Macro Research
124Rivkin
125Sharecafe
126Sky News Australia
127Small Caps
128Stock Analysis
129Sure Dividend
130Switzer Daily
131The Bull
132The Economic Club of Washington D.C.
133The Economist
134The Global CIO Office
135The Hedge Fund Journal
136The Motley Fool
137Options Clearing Corporation (OCC)
138The Options Edge
139The Options Industry Council (OIC)
140Thomson Reuters
141Thornburg Investment Management
142Traders Circle
143TradingHours.com
144TradingView
145Investor.gov - U.S. Securities and Exchange Commission
146VANDA Insights
147Vanguard
148Vanguard Australia
149VectorVest Australia
150WFE - World Federation of Exchanges
151World Bank
152World Economic Forum
153WSJ - The Wall Street Journal
154Yahoo Finance

Beta Coefficient (β)

Notes

The Beta Coefficient measures the volatility of a particular share (systematic risk) in comparison to the market (unsystematic risk). It describes the sensitivity of a security’s returns in response to swings in the market.

Systematic risk is the underlying risk that affects the entire market. Large changes in macroeconomic variables, such as interest rates, inflation, GDP, or foreign exchange, are changes that impact the broader market and that cannot be avoided through diversification. The Beta coefficient relates ‘the market’ systematic risk to ‘stock-specific’ unsystematic risk by comparing the rate of change between ‘the market’ and ‘stock-specific’ returns.

Statistically, beta represents the slope of the line through a regression of data points from an individual stock’s returns against those of the market.

The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market, and how volatile or risky it is compared to the market.

For beta to provide any insight, the ‘market’ used as a benchmark should be related to the stock.

For example, calculating a bond ETF’s beta by using the S&P 500 as the benchmark isn’t helpful because bonds and stocks are too dissimilar. The benchmark or market return used in the calculation needs to be related to the stock because an investor is trying to gauge how much risk a stock is adding to a portfolio.

A stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, but it also doesn’t increase the theoretical potential for greater returns.

 

The beta of the market portfolio is always 1.0

  • β = 1.0  (The security has the same volatility as the market as a whole.)
  • β > 1.0  (Aggressive investment with volatility of returns greater than the market.)
  • β < 1.0  (Defensive investment with volatility of returns less than the market.)
  • β < 0.0  (An investment with returns that are negatively correlated with the returns of the market.)

 

 


Formula

 

$$  Beta\;Coefficient\;(β)  = \left [Covariance (rp, rb) \over Variance (rb) \right ]$$

 


Beta Coefficient

 

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Beta (β) Value:

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