Definition
The Holding Period Return (HPR) formula is a financial method used to calculate the total returns on an investment over the entire period it was held by an investor. It takes into account both capital gains and dividends or interest received, if any. The formula is: HPR = (Ending value of the investment – Beginning value + Cash inflows during the period) / Beginning value of the investment.
Key Takeaways
- The Holding Period Return Formula is used to calculate the total return received from holding a particular investment for a specified period. This return includes all forms of income, dividends, and capital gains.
- This comprehensive measure allows an investor to assess both the growth and income return over the holding period, thus giving a full perspective on investment performance.
- The Holding Period Return Formula is not limited to any specific time period and can be used for any investment duration, offering a high degree of flexibility to investors in tracking their returns.
Importance
The Holding Period Return Formula (HPR) is important in finance as it provides investors with the ability to accurately assess the total returns, including both capital gains and investment income, from an investment over its entire holding period.
This measure is significant because it gives more comprehensive insights compared to price returns which only consider capital gain.
The HPR Formula accounts for dividends, interest, and other cash distributions, allowing for more accurate performance comparisons among different investments or securities.
Also, by allowing investors to measure returns over various time frames, the formula helps in making informed investment decisions and understanding the performance of investment strategies over time.
Explanation
The Holding Period Return (HPR) formula is a core financial tool used by investors and financial analysts with the main purpose of measuring the total returns on an investment over the period it was held. It presents a comprehensive picture of the gains or losses from an investment by considering both capital gains and any returns in the form of dividends or interest.
This way, the HPR formula factors in all possible sources of returns, providing a realistic analysis of an investment’s profitability. The HPR formula is vital for portfolio analysis and devising investment strategies.
For example, investors can compare the returns of various investments over their respective holding periods. This comparison helps in identifying which investment options have been performing better, under different market conditions.
Also, it determines whether to continue holding an investment or sell it by analyzing past return patterns. Hence, HPR enables investors and analysts to make more informed and sensible investment choices.
Examples of Holding Period Return Formula
Stock Investment: Kevin bought 100 shares of XYZ Company at a price of $20 per share. After a year, the price went up to $25 per share. Besides, he also received a dividend of $2 per share during that year. The Holding Period Return (HPR) can be calculated as the summation of the capital gain ((Price at end – Price at beginning)/Price at beginning) and income from the stock (Dividends/Price at beginning). Here it is ((25*100 -20*100)/20*100) + (2*100)/20*100) = 25% + 10% = 35%.Bond Investment: Susie bought a bond with a face value of $1000 at a discount price of $
The bond has a 5-year maturity period and pays an annual interest of 5%. The HPR formula is used to calculate the return rate at the end of the first year. The return rate equals interest received plus difference in price, divided by the original price ((50 + 50)/950 =53%).
Real Estate: Richard bought a property for $500,After three years, he sold the property for $650,
During those three years, he also collected a total of $45,000 in rent from the property. The holding period return will be ((650,000 – 500,000) + 45,000) /500,000 = 39%.
Frequently Asked Questions – Holding Period Return Formula
What is the Holding Period Return Formula?
The Holding Period Return Formula is a financial calculation used to measure the total return received from an investment over its lifespan. The formula factors in both the investment’s capital gains and any income generated by the investment. It’s a widely used metric to evaluate the effectiveness of an investment strategy.
How is the Holding Period Return Formula calculated?
The Holding Period Return Formula is calculated by dividing the income gained from the investment (plus the difference of the selling price and the initial cost) by the initial cost of the investment. This result is then multiplied by 100 to get a percentage.
What does a high Holding Period Return imply?
A high Holding Period Return implies that the investment was significantly profitable relative to the initial cost. It indicates a good investment strategy and is seen as desirable by investors.
Can the Holding Period Return be negative?
Yes, a Holding Period Return can be negative. This would imply that the investor incurred a loss over the investment holding period, which is the selling price is less than the initial cost despite any income the investment may have generated.
How often should I calculate the Holding Period Return?
The frequency of the calculation depends on your investment strategy. However, it is typically done annually to review the yearly performance of the investments.
Related Entrepreneurship Terms
- Capital Gains
- Dividend Income
- Initial Investment Cost
- Ending Investment Value
- Rate of Return
Sources for More Information
- Investopedia: This site has various finance and investment resources, including the Holding Period Return Formula
- Fidelity: Known for their expertise in finance and investment, they provide resources about different finance terms including the Holding Period Return Formula
- Financial Express: A well-known financial news site which offers numerous articles and resources about finance terms
- CFA Institute: As a global, nonprofit member organization of financial analysts, portfolio managers, and other investment professionals, it provides a wealth of information about financial concepts, tools, and formulas.
