Anticipated Annual Rate of Return for Stock Market Series

Anticipated Annual Rate of Return for Stock Market Series

Prev Question Next Question

Question

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 series value: 2060

Expected dividends during the period: $41.20

Observed beginning series value: 1579.81

Required rate of return: 21% per year

What is the anticipated annual rate of return for this stock market series? (Assume a one-year holding period.)

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

B

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.

Prev Question Next Question