A client has a portfolio with a current market value of $500,000. Over the past year, the portfolio generated $25,000 in dividends and interest, and realized capital gains of $15,000. Additionally, the portfolio's unrealized capital gains amounted to $10,000. What is the client's holding period return for the year?
- A8.00%
- B10.00%
- C7.00%
- D5.00%
Show answer & explanationAnswer & explanation
Correct answer: B. 10.00%
Holding period return (HPR) is calculated as (Income + Capital Gains) / Beginning Value. The 'income' includes dividends and interest ($25,000). The 'capital gains' include both realized ($15,000) and unrealized ($10,000) gains. The 'beginning value' is the current market value minus total gains and income, if not explicitly provided as beginning value. However, if the question implies the $500,000 is the beginning value and the gains/income are *over* that year, then the calculation is straightforward. Let's assume $500,000 is the beginning value for the simplicity of the question. Total return = $25,000 (income) + $15,000 (realized gains) + $10,000 (unrealized gains) = $50,000. Holding Period Return = $50,000 / $500,000 = 0.10 or 10.00%.
Why the other options are wrong
- A. This considers dividends, interest, and realized gains ($40,000 / $500,000 = 8%), but does not include unrealized gains.
- C. This only considers dividends, interest, and realized gains ($40,000 / $500,000 = 8%), but the option is 7%.
- D. This only considers dividends and interest ($25,000 / $500,000).
Holding Period Return (HPR)
The total return on an investment over a specified period, including all income and capital gains (realized and unrealized).
- Formula: (Ending Value - Beginning Value + Income) / Beginning Value.
- Can also be calculated as (Income + Capital Gains) / Beginning Value.
- A simple measure of performance over a single period.
Memory trick: Performance is about 'RETURNS': Realized, Total, Unrealized, Net.