Return

The return from holding an investment over some period - say, a year - is simply any cash payments received due to ownership, plus the change in market price, divided by the beginning price. You might, for example, buy for $100 a security that would pay $7 in cash to you and be worth $106 one year later. The return would be ($7 + $6)/$100 = 13%. Thus return comes to you from two sources: income plus any price appreciation (or loss in price).

For common stock we can define one-period return as

R = Dt + (Pt − Pt−1) / Pt−1

where R is the actual (expectcd) return when t refers to a particular time period in the past (future); Dt is the cash dividend at the end of time period t; Pt is the stock's price at time period t; and Pt−1 is the stock's price at time period t−1. Notice that this formula can be used to determine both actual one-period returns (when based on historical figures) and expected oneperiod returns (when based on future expected dividends and prices). Also note that the term in parentheses in the numerator of Eq. represents the capital gain or loss during the period.

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