1
- This measures the return you expect from a stock in 1 year.
- It combines dividends and the increase in the stock price.
- Example:
- Dividend = 4 pesos
- Expected Price= 52
-
Current Price= 48
- Price increase =52 (expected price) - 48 (current price) = 4 pesos
- Total return = 4+4divide48
- = 16.7%
FORMULA:
Expected HPR = = E(D1) + [E(P1) – P0] / P0
Expected HPR = E(r) = 4 + (52-48) / 48 = .167 = 16.7%
1st: EP minus CP= TOTAL PRICE INCREASES
2nd: Dividend plus Price Increases divide Current Price
Note that:
E() denotes an expected future value. E(P1) represents expectation today of the stock price one year from now.
E(r) is referred to as the stock’s expected holding-period return.
It is the sum of expected dividend yield, E(D 1 ) / P 0 , and the
expected rate of price appreciations, the capital gains yield, [E(P 1 ) – P 0 ] / P 0 .
Expected Holding-Period Return (HPR):
2
- This calculates how much return you should expect based on the stock's risk.
- If the expected return is higher than the required return, the stock offers more return for its risk, so it’s a good investment.
Formula: k=rf+β×(E(rm)−rf)k=rf+β×(E(rm)−rf)
- Risk-free rate (rfrf) = 6%
- Market risk premium = 5%
- Stock risk (ββ) = 1.2
- Required return = k=12%k=12%.
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