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    Understanding Holding Period Return

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    Understanding Holding Period Return

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    sn n
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    Understanding Holding Period Return

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    Understanding Holding Period Return

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    15 views2 pages

    Understanding Holding Period Return

    Uploaded by

    sn n
    Understanding Holding Period Return

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    ### Understanding Holding Period Return (HPR)

    **Holding Period Return (HPR)** is a way to measure the total return (gain or loss) you get from an
    investment over the period you hold it. It tells you how much money you made (or lost) from the time
    you bought the investment until the time you sold it.

    #### **What is HPR?**

    - **HPR** gives a snapshot of how well an investment has performed over the time you owned it. It
    doesn’t care about the length of time — it just looks at the start and the end.

    - Think of HPR like a report card for your investment: it tells you how much money you gained or lost in
    total during the period you held the investment.

    #### **Formula for HPR:**

    HPR can be calculated in different ways, but the most common formula is:

    \[
    \text{HPR} = \frac{\text{Ending Price} + \text{Distributions} - \text{Beginning Price}}{\text{Beginning
    Price}}
    \]

    - **Ending Price**: The price of the investment when you sell it.
    - **Beginning Price**: The price of the investment when you bought it.
    - **Distributions**: Any extra money you earned from the investment during the holding period (like
    dividends or interest).

    #### **How to Use HPR:**

    1. **Determine the Beginning Price:** The amount you paid to purchase the investment.
    2. **Find the Ending Price:** The amount for which you sold the investment.
    3. **Include Distributions:** Add any extra earnings (like dividends, interest) you received while holding
    the investment.
    4. **Apply the Formula:** Plug these values into the formula to calculate the HPR.

    #### **Example of Calculating HPR:**

    Imagine you bought a stock for **$100** and sold it after one year for **$120**. Additionally, you
    received **$5** in dividends during this time.

    1. **Beginning Price:** $100


    2. **Ending Price:** $120
    3. **Distributions:** $5

    Now, calculate the HPR:

    \[
    \text{HPR} = \frac{120 + 5 - 100}{100} = \frac{25}{100} = 0.25 \text{ or } 25\%
    \]

    This means your investment gained **25%** over the period you held it.

    #### **Why is HPR Useful?**

    - **Simple and Direct:** HPR gives a straightforward measure of how much you’ve earned or lost
    without needing to think about the time period.
    - **Useful for Short-Term Comparisons:** Great for comparing returns on investments that you’ve held
    for different lengths of time.

    #### **Limitations of HPR:**

    - **Doesn't Account for Time:** HPR doesn’t show how long you held the investment. A 25% return
    could be fantastic over one month but not so great over ten years.
    - **Not Annualized:** To compare investments fairly, you often need to convert HPR to an annual
    return (like APR or EAR) to see what you might earn in a year.

    #### **Bottom Line:**

    HPR is a quick way to see how much you gained or lost during the period you held an investment.
    However, it’s important to remember that it doesn’t tell the whole story, especially if you want to
    compare investments over different time periods. To make meaningful comparisons, you might need to
    annualize the return.

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