Anticipated Rate of Return for Stock Market Series

Anticipated Rate of Return Calculation

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Question

An economist with Smith, Kleen & Beetchnutty Institutional Brokerage has been examining a stock market series and is trying to determine the anticipated rate of return for the series. In her research, this economist has determined the following information:

Anticipated ending value: 11,800

Expected dividends during the period: $521

Observed beginning value: 10,050.14

Required rate of return: 17.50%

Using this information, what is the anticipated rate of return for this stock market series? (Assume a oneyear holding period).

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Explanations

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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)

= [$11,800 - $10,050.14 + $521]/10,050} = 22.60%. This figure is significantly higher than the required rate of return. Assuming that the anticipated ending value and expected dividends prove accurate, investment in this stock market series is likely advisable.

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