Marlene Gooseberry, an institutional money manager with Middle Road Brokerage, has been examining a stock market series and has determined the following information:
Anticipated ending value: 2060 -
Expected dividends during the period: $41.20
Observed beginning value: 1579.81
Required rate of return: 21%
Using this information, what is the anticipated rate of return for this stock market series? (Assume a oneyear holding period).
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A. B. C. D. E.A
To calculate the expected rate of return for a stock market series, the following information must be known:
The beginning value for the series, the anticipated ending value for the series, and the amount of any dividends and/or shareholder distributions during the period.
Once this information has been determined, the expected return on a stock market index can be found by employing the following equation:{E(R) = [(EV - BV +
Div) / BV]}. Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.
In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows: {E(R)
= [$2060 - $1579.81 + $41.20] / $1579.81} = 33.00%.
This is significantly greater than the required rate of return (21%). If the assumptions behind the expected ending value and dividends are both realistic and accurate, investment in this stock market series is likely advisable.