Holding period return is the total return received from holding an asset or a portfolio of assets over a period, known as the holding period. It is generally expressed as a percentage and is particularly useful for comparing returns on investments purchased at different periods.
Key Takeaways
- Total return over a holding period: Holding period return (HPR) is the total return earned on an investment during the time it has been held.
- Defines the holding period: The holding period is the time the investment is held by an investor, or the time between the purchase and sale of a security.
- Comparison across timeframes: HPR helps in making comparisons between returns on investments bought at different periods.
Understanding Holding Period Return
Holding period return is calculated based on total returns from the asset or portfolio (income plus changes in value). It allows for comparisons between investments held for different periods.
Starting the day after a security’s acquisition and continuing until its sale, the holding period determines tax implications. For example, Sarah bought 100 shares of stock on Jan. 2, 2023. Her holding period begins counting on Jan. 3, 2023. The third day of each month thereafter counts as the start of a new month, irrespective of its length.
If Sarah sold her stock on Dec. 23, 2023, she would realize a short-term capital gain or capital loss as her holding period is less than one year. If she sold on Jan. 3, 2024, it would be a long-term capital gain or loss since her holding period exceeds one year.
Calculating Holding Period Return
Holding Period Return (HPR) and annualized HPR for returns over multiple years can be calculated as follows:
\text{Holding Period Return} = \frac{\text{Income} + ( \text{End Of Period Value} − \text{Initial Value} )}{\text{Initial Value}}
Returns computed for regular periods like quarters or years can be converted to a holding period return as well.
Example of Holding Period Return/Yield
Here are some examples of calculating holding period return:
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Stock Purchase with Dividends:
An investor bought stock a year ago at $50 and received $5 in dividends. The current stock price is $60.
\text{HPR} = \frac{5 + (60 − 50)}{50} = 30\% -
Comparing Mutual Funds:
Fund X, held for three years, appreciates from $100 to $150 and provides $5 in distributions. Fund B, held for four years, goes from $200 to $320 and generates $10 in distributions.
\text{HPR for Fund X} = \frac{5 + (150 − 100)}{100} = 55\%
ewline \text{HPR for Fund B} = \frac{10 + (320 − 200)}{200} = 65%
3. **Annualized HPR Calculation**:
```math
\text{Annualized HPR for Fund X} = (0.55 + 1)^{1/3} − 1 = 15.73\%
ewline
\text{Annualized HPR for Fund B} = (0.65 + 1)^{1/4} − 1 = 13.34\%
Despite having a higher HPR, Fund B’s annualized HPR, necessary for comparison, shows Fund X as the superior investment.
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Stock Portfolio Quarterly Returns:
Your portfolio had returns: +8%, -5%, +6%, +4%. The benchmark index’s annual return was 12%.
\text{HPR for Stock Portfolio} = [(1 + 0.08) \times (1 - 0.05) \times (1 + 0.06) \times (1 + 0.04)] − 1 = 13.1\%Your portfolio outperformed the index by 1.1%. Ensure the risk profile of both is compared to judge if the extra return was due to higher risk.
Is Holding Period Return the Same as Rate of Return?
Essentially, yes. The rate of return indicates how much an investment earned or lost in percentage terms, similar to HPR, which provides the return within the holding period.
Why Do We Need Holding Period Return?
HPR is vital as it considers both appreciation and income payments. It excels in comparing the performance of investments held over varying durations.
What Does Holding Period Mean?
The holding period refers to the time a security is held. It starts when an investment is purchased and ends when it’s sold.
Can Holding Period Return Be Negative?
Yes. Investments, even dividend-paying stocks, can have negative holding period returns if they depreciate in value.
The Bottom Line
A holding period return represents the total return from holding an asset or collection of assets over a specific time. Calculating HPR involves subtracting the purchase price from the sale price, adding any received income, and dividing by the initial value. Multiply by 100 to express it as a percentage.
Knowing your holding period return simplifies comparisons between investments, especially those held for different durations.
Related Terms: total return, portfolio, capital gain, capital loss.
References
- Internal Revenue Service. “Topic No. 409 Capital Gains and Losses”.
