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Holding Period Return (Yield)



Definition

The Holding Period Return (HPR), also known as the holding period yield, is a measure of investment performance that takes into account all cash flows received over a specified time period, including dividends, interest, and capital gains, in addition to changes in the investment’s market price. The HPR is used to calculate the total return from an investment during the time it was held. It is a comprehensive way to assess investment profitability, allowing for comparison across different types of investments and time frames.

Phonetic

The phonetics of the keyword “Holding Period Return (Yield)” would be:Holding: /ˈhoʊl.dɪŋ/Period: /ˈpɪər.i.əd/Return: /rɪˈtɜːrn/Yield: /jiːld/

Key Takeaways

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  1. Holding Period Return is a measure used to evaluate the total returns from an investment during a particular period. It includes both capital gains and income returns generated from the investment, making it a comprehensive indicator of investment performance.
  2. The yield or return generated from an investment can vary substantially over different holding periods. Therefore, the Holding Period Return is crucial for understanding the return on investment over time and helping in investment decision making by indicating historical performances.
  3. Calculation of Holding Period Return involves taking into account the income received through dividends or interest and the capital gain or loss during the investment period. This sum is divided by the original price of the investment, giving the total return in percentage form, which is crucial for comparing returns on different types of investments.

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Importance

The Holding Period Return (HPR), also known as yield, is a crucial concept in finance and business as it serves as a comprehensive measure of the return on an investment or a portfolio. HPR takes into account all forms of return including dividends, interest earned, and changes in price, thereby providing a complete picture of the investment’s yield over its entire holding period. It enables investors and financial analysts to evaluate the performance and the profitability of an investment, facilitating comparison with other investments. As an integral component in the process of decision making, it aids in identifying which investments should be held onto, considering their potential long-term returns, based on past performance. Hence, the importance of HPR lies in its ability to guide strategic investment decisions, aiding in portfolio optimization, and ultimately, helping to maximize returns.

Explanation

Holding Period Return (HPR), also known as Holding Period Yield, serves as a comprehensive measure that reflects the total returns on an investment, portfolio, or asset over the duration of its holding period. It encompasses all returns including dividends, interest, and changes in the capital value of the asset, thus providing a holistic measure of the total gains or losses made from an investment. The main purpose of HPR is to guide investors in effectively analyzing the profitability and performance of their investments over a specific time period.Understanding Holding Period Return is critical for investors as they can utilize it for comparing and contrasting the performance of different investments, thereby helping in making informed decisions about continuing, disposing, or further investing in the said assets. It paints a clear picture of past performance, which, although it does not guarantee future returns, presents a vital tool in predicting potential profitability. Additionally, given its wide scope, it is particularly useful when the return on the investment comes from various channels and not solely the capital gains.

Examples

1. Stock Investments: Consider an investor who bought a share of company A at $100, and after two years sold it at $120. During those two years, he also received dividends of $5 per year. Therefore, his holding period return would be $30 ($20 capital gain + $10 dividends) divided by his initial investment of $100, resulting in an HPR of 30%.2. Real Estate: Suppose a real estate investor purchases a property for $500,000. After three years, he sells the property for $600,000. During that period, he also earned $60,000 in rental income. In this case, his HPR would be calculated as ($100,000 (capital gain) + $60,000 (rental income)) / $500,000 (initial investment) equals a 32% return.3. Bond Investments: If an investor purchases a bond with a face value of $1000 at a price of $950 and holds it until maturity while receiving an annual coupon payment of $50. The holding period yield is calculated by adding the capital gain ($50, which is the difference between the face value and the purchase price) with the sum of coupon payments (let’s assume the bond maturity is 2 years, so $50 x 2 = $100) divided by the purchase price of the bond ($950). That would be a 15.8% return.

Frequently Asked Questions(FAQ)

What is Holding Period Return (Yield)?

Holding Period Return (Yield) is a finance, business term used to describe the total return on an investment or a portfolio over the entire period that it was held. It is often expressed as a percentage and includes gains or losses from capital appreciation and any dividends or interest received.

How is Holding Period Return calculated?

Holding Period Return is calculated by taking the ending value of the investment, subtracting the beginning value, and then dividing by the beginning value of the investment. This result is then typically multiplied by 100 to give a percentage return.

What does a positive or negative Holding Period Return indicate?

A positive Holding Period Return denotes that the investment has gained value over the holding period. Conversely, a negative Holding Period Return suggests that the investment has lost value over the holding period.

Does the Holding Period Return include dividends and interest?

Yes, the Holding Period Return should include any dividends received or interest earned over the holding period as part of the total return.

How is Holding Period Return different from Annualized Return?

While the Holding Period Return refers to the total return over the entire period an investment was held, an Annualized Return expresses that total return as an average per year. It provides a more standardized measure for comparing the performance of different investments.

Can the Holding Period Return be used to assess the performance of various assets?

Yes, the Holding Period Return can provide a basic measure of how different investments have performed over their respective holding periods. It can be a valuable tool in investment analysis and decision-making.

How frequently should I calculate my Holding Period Return?

The frequency of calculation largely depends on your investment goals. However, it’s typically recomputed whenever there are cash inflows/outflows from the portfolio to correctly assess investment performance.

Is the Holding Period Return the only performance measure I should consider for my investments?

Although it’s a crucial part in assessing performance, Holding Period Return should not be the only measure considered. Other metrics like risk, tax implications, and your overall financial plan should also be accounted for when evaluating investments.

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