Accurate return measurement will be essential on evaluating investment plan probability of success, revise of projection or determine any contingency plan is required.
One of fundamental concept on return measurement is holding period return. ( HPR ) , the return that an investor earn over a specific holding period. The holding period can be any period from one day, one week, one month, one year and so on.
HPR = (P1 – P0 + CF1) / P0
P0 = initial investment
P1 = price of investment received at the end of the holding period
CF1 = cash paid by the investment at the end of investment period
For example, an investor purchased stock A at price of $10 and price of stock A increased to $12 by end of the period. Stock A paid $0.50 dividend by end of the period.
HPR = ( 12 – 10 + 0.5 ) / 10 = 25%
For portfolio investment, we compute the expected rate of return for a portfolio of investment is simply the weighted average of the expected rates of return for the individual investments in the portfolio. The weights are the proportion of total value for the individual investment.
An example of expected rate of return for a portfolio is illustrated as below. The expected return for this portfolio of investment would be 11.10%.
