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Holding Period Return Formula – Explanation – Example

What Is the Holding Period Return?

Holding Period ReturnThe holding period return is the total return or yield received over the period of time an investment is held by an investor.  It is usually expressed as a percentage.

HPR is a measure of the total yield received from holding an asset or portfolio of assets over a specific period of time.  This is referred to as the holding period. Holding period return is calculated on the basis of the total returns from an asset or portfolio considering all income plus changes in value. It is particularly useful for comparing returns between investments held for different periods of time. For example, investors can measure the return over very short time periods such as days, or much longer periods spanning decades.

The holding period return is a fundamental metric in investment management. The measure provides a comprehensive view of the financial performance of an asset or investment.  This is because it considers the appreciation of the investment, as well as the income distributions related to the asset. There are two common sources of returns for investments like bonds, stocks, and real estate.  They are either capital gains, income, or a combination of the two.

  • A capital gain or loss is the difference between the investment’s value when it was purchased and its value after a certain holding period.
  • Income comes from dividends, rents, and the like.

The HPR can be used to compare the performance of different investments or assets. In addition, this measure is used to identify the appropriate tax rate.

Holding Period Return Formula

HPR can be calculated as follows:

Holding Period Return = [Income + (V2 – V1)] / V1

  • Income – Distributions or cash flows from the investment. Income can take one of two forms: dividends or interest.
  • V2 – Ending value of the investment. Ending value is either your date of the disposition or the date through which you are measuring your return. You don’t necessarily have to dispose of the investment on the end date to calculate your return.
  • V1 – Beginning value of the investment. Beginning value is the amount you paid for your investment. Beginning value is also valuable from a time perspective because it indicates the beginning of your holding period.

Returns computed for regular time periods such as quarters or years can be converted to a holding period return as well.

Holding Period Return and Capital Gain or Loss

Holding period return is the total yield received from holding an asset or portfolio of assets over a specified timeframe, generally expressed as a percentage. HPR is calculated on the basis of total returns from the asset or portfolio measuring income plus changes in value. It is useful for comparing returns between investments held for different periods of time. However, it is a straightforward method for determining tax implications.

Taxable gains calculations start on the day after the security’s acquisition and continue until the day it is sold.  The holding period determines the long-term or short-term tax exposure. For example, Daytradrr purchases 100 shares of stock on Jan. 3, 2019. To determine the holding period, we begin counting on Jan. 4, 2019. The fourth day of each month after that counts as the start of a new month.  This is regardless of how many days each month actually contains. If Daytradrr sells the stock on December 20, 2016, there is a short-term capital gain or a capital loss.  This is because her holding period is less than one year. If Daytradrr sells the stock on Jan. 5th, 2020, there is a long-term capital gain or loss because the holding period is more than one year.

Holding Period Return Examples 

HPR Example 1

Three years ago, Daytradrr invested $20,000 in the shares of  Johnson & Jackson Corp. Each year, the company distributed dividends to its shareholders. Each year, Daytradrr received $300 in dividends. Since Daytradrr received $300 in dividends each year, the total income is $900. Today, Daytradrr sells the shares for $26,000.  Let’s determine the HPR for the investment. Using the HPR formula:

HPR = ($900 + $26,600 – $20,000) / $20,000 = 0.375 or 37.5%

Daytradrr’s investment in the shares of Johnson & Jackson Corp. earned 37.5% for the entire period of holding the investment.  The investment was held for 3 years: 37.5% / 3 years = 12.5%.  Therefore, Daytradrr realizes an annualized return of 12.5% per year.

HPR Example 2

An investor bought a stock a year ago at $60 and received $5 in dividends over the year.  If the stock is now trading at $70, what is the HPR?

HPR = ($5 + $70 – $60) / $60 = 0.25 or 25%

HPR Example 3

Which investment performed better?  Mutual Fund A was held for three years and appreciated from $1000 to $1450, providing $50 in distributions.  Mutual Fund Y went from $2000 to $2500 and generated $100 in distributions over the same period.

  • HPR Fund A = ($50 + $1450 – $1000) / $1000 = 0.50 or 50%
  • HPR Fund Y = ($100 + $2500 – $2000) / $2000 = 0.30 or 30%

Fund Y generated  $600 in gains and income compared to Fund A which generated $500 in gains and income.  However, on a percentage basis, Fund A outperformed Fund Y with a 50% vs 30% return.

Conclusion

Determining an asset’s historical HPR can help to decide whether or not to invest.  For apples-to-apples comparisons, it is important to do an annualized HPR calculation.  This means HPRs of several years need to be considered. This is because returns can fluctuate dramatically from year to year.  Also, values obtained from a single-year computation will not be accurate.

Clearly, HPR plays a significant role in understanding risk-related investment issues.  However, that is not the only purpose it serves. This metric can also be used to assess the value of an investment, compare the values of different investments, and determine tax implications.

  • Holding Period Return is a metric that indicates how much yield an asset or portfolio of assets has earned over its holding period.
  • The HPR formula requires three variables: income, initial value, and end-of-period value.
  • The HPR ratio is usually expressed as a percentage.
  • HPR serves four common uses – to assess investment risk, determine investment value, compare multiple investment values, and understand tax implications.

HPR is usually used to compare the performance and returns among investments held for varying time periods. From the perspective of investment management, it is an important metric.  it gives a comprehensive view of the financial performance of an investment.  It does this by taking into consideration both the value appreciation of the investment and its income distributions.

Up Next: What Is Cyclical Unemployment?

Cyclical Unemployment Cyclical unemployment is a specific type of unemployment that results in temporary high unemployment rates. It is caused by a downturn in the business cycle with reduced demand for goods and labor.

Cyclical unemployment is a component of overall or aggregate unemployment.  It occurs naturally during the cycles of economic upturn and downturn. Unemployment typically rises during recessions and declines during economic expansions. Limiting cyclical unemployment during recessions the primary goal for federal governments.  They use various policy tools to stimulate the economy. Understanding recessions and unemployment is a major motivation behind the study of economics.

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