Calculate One-Year Holding Period Return (HPR) for Investment Alternatives

Calculate the one-year holding period return (HPR) for the following two investment alternatives. Which investment would you prefer, assuming they are of equal risk? Explain.

Investment X:

Cash received: 1st quarter $1.05, 2nd quarter $0.37, 3rd quarter $0.47, 4th quarter $4.02

Investment value: Beginning of year $27.09, End of year $31.65

Investment Y:

Cash received: 1st quarter $1.81, 2nd quarter $1.81, 3rd quarter $1.81, 4th quarter $1.81

Investment value: Beginning of year $48.94, End of year $52.56

Answer:

The HPR for investment X is 38.60% and for investment Y is 22.20%.

To calculate the one-year holding period return (HPR) for each investment, we need to use the following formula:

HPR = [(Ending Value + Dividends) / Beginning Value] - 1

For investment X:

Ending Value: $31.65

Dividends: $1.05 + $0.37 + $0.47 + $4.02 = $5.91

Beginning Value: $27.09

Calculating HPR for investment X:

HPR = [($31.65 + $5.91) / $27.09] - 1

HPR = [$37.56 / $27.09] - 1

HPR = 1.386 - 1

So the HPR for investment X is 38.60%.

For investment Y:

Ending Value: $52.56

Dividends: $1.81 + $1.81 + $1.81 + $1.81 = $7.24

Beginning Value: $48.94

Calculating HPR for investment Y:

HPR = [($52.56 + $7.24) / $48.94] - 1

HPR = [$59.80 / $48.94] - 1

HPR = 1.222 - 1

So the HPR for investment Y is 22.20%.

Comparing the two investments, investment X has a higher HPR than investment Y. Assuming they are of equal risk, I would prefer investment X because it has a higher return.