Question

QUESTION 14 6.25 points Save Answer ABC stock has the following probability distribution and expected year-end prices: State Probability 25 4 35 Year-end Price $50 $60 $70 2 If you purchase the stock today for $55/share and you expect it to pay a dividend of $4/share, what is you expected holding period yield over the course of the year? Hint: If dividends are paid, HPY- [(ending price+dividends)/beginning price]-1 0.1818 O.1091 O-.0328 O0984

Answer 1

Holding Period Yield (HPY) is refers to return that an investor get for holding an investment for a particular period. It is sum of capital appreciation (price change during period) and any dividend received.

$HPY = \frac{(P_{1}-P_{0})+D}{P_{0}}$

Where,

P1 = Expected price of stock at end of period

P0 = Price of stock at beginning

D= Dividend

In order to calculate holding period yield, we first need to calculate the expected price of stock at end.

$Expected Price(P_{1}) = \sum_{n=1}^{n}p_{n}\times E(P)_{n}$

where,

p_n = Probability

E(P)= expected price

State	Probability(p)	Expected Price E(P)	p*E(P)
1	.25	$50	$12.5
2	.4	$60	$24
3	.35	$70	$24.5
Expected Price at end (P1)			$61

Now, we have

P1 = $ 61

P0 = $ 55

D = $ 4

HPY = {(61-55) + 4}/55

= 0.1818

Thus, Holding Period Yield is 0.1818

Please note -

formula provided in question is same just expression is different. we can get same answer with that too.

HPY = {(61+4)/55}-1

= 0.1818