Assume the following information about a stock market series:
Observed beginning series value: 515.60
Anticipated ending series value: 609.15
Expected dividends during the period: $24
Required rate of return: 21% per year
What is the expected annual rate of return for this index? (Assume a one-year holding period.)
Click on the arrows to vote for the correct answer
A. B. C. D. E.E
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 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) = [$609.15 - $515.60 + $24] / $515.60 = 22.80%
This is slightly higher than the required rate of return. Assuming that the ending value and dividends prove accurate, investment in this stock market series is likely advisable.