The total return on an asset or investment portfolio over its holding period
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The Holding Period Return (HPR) is the total return on an asset or investment portfolio over the period for which the asset or portfolio has been held. The holding period return can be realized if the asset or portfolio has been held, or expected if an investor only anticipates the purchase of the asset.
Generally, the HPR is expressed in percentages. Frequently, it is annualized to determine the rate of return per year.
The Holding Period Return in Investment Management
The holding period return is a fundamental metric in investment management. The measure provides a comprehensive view of the financial performance of an asset or investment because it considers the appreciation of the investment, as well as the income distributions related to the asset (e.g., dividends paid).
The HPR can be used to compare the performance of different investments or assets. In addition, this metric is used to identify the appropriate tax rate.
Formula for Calculating the Return
The general formula for calculating the HPR is:
Income – the distributions or cash flows from the investment (e.g., dividends)
Vn – the ending value of the investment
V0– the beginning value of the investment
If you need to calculate the annualized HPR, you can use the following formula:
Finally, the returns can be calculated quarterly. Using the formula below, you can translate the quarterly HPR into the annual HPR:
r1, r2, r3, r4 – the quarterly holding period returns
Example of Holding Period Return
Three years ago, Fred invested $10,000 in the shares of ABC Corp. Each year, the company distributed dividends to its shareholders. Each year, Fred received $100 in dividends. Note that since Fred received $100 in dividends each year, his total income is $300. Today, Fred sold his shares for $12,000, and he wants to determine the HPR of his investment.
Using the HPR formula, we can find the following:
Thus, Fred’s investment in the shares of ABC Corp. earned 23% for the entire period of holding the investment.
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