Markowitz Portfolio Theory

Return On Investment
Return on Share:
i) Dividend payment during the holding
period.
ii) Capital Gain (loss): Difference in the
purchase price and selling price of the share. If
positive, it is capital gain and if negative, it is
capital loss.
Example: Mr. Shah purchased 100 shares of
stock of VC Company at the beginning of the
year at a price of $ 37 per share.
Return On Investment
Mr. Shahs total investment at the beginning of
the year:
C0 = $37 x 100 = $ 3,700
Dividend payment over the year = $ 1.85/share
Total Dividend Income = $ 1.85 x 100 = $ 185
Share price at the end of the year = $ 40.33
Capital Gain per share = $ 40.33 - $37 = $3.33
Total Capital Gain = $ 3.33 x 100 = $ 333
If share price at the end of the year = $ 34.78
Calculate Capital Gain (Loss) on the investment?
Return On Investment
The total return on Mr. Shah Investment is the sum of the
dividend income and the capital gain or loss on the
investment:
Total dollar return = Dividend Income + Capital
gain (or loss)
Total dollar return = $ 185 + 333 = $ 518
Now if Mr. Shah sold the shares at the end of the year:
Total cash if shares are sold = Initial Investment +
Total Dollar Return
= $ 3,700 + $518 = $ 4,218
OR
Selling Price x No. of shares + Dividends
= $40.33 x 100 + $185
= $4,033 + $185 = $4,218

Return On Investment
Holding Period Return: HPR
Total Dividends Paid + Ending Market Value of Investment
Beginning Market Value of Investment
185 + 4,033 = 4,218 = 1.14
3,700 3,700
Holding Period Yield = HPR 1 = 1.14 1 = 0.14
= 14%
Return On Investment
Percentage Return:
Let us suppose the beginning of the year = t
Pt = the price of the stock at the beginning of the year
Divt+1 = the dividend paid during the year
Dividend Yield = Divt+1 / Pt
= $1.85 / $37 = 0.05
= 5%
Pt+1 = the price of stock at the year end
% Capital Gain = (Pt+1 - Pt )/ Pt = ($40.33 - $37)/$37
= $3.33/$37 = 0.09 = 9%



Return On Investment
Combining the two results:
Rt+1 = Divt+1 / Pt + (Pt+1 Pt) / Pt
= 0.05 + 0.09 = 0.14
= 14%
Question: A stock begins the year with a price of
$25 per share and ends with a price of $35 per
share.
During the year it paid a $ 2 dividend per share.
What are its dividend yield, its % capital gain and
its total holding period return and holding period
yield

Return On Investment
Year 1 2 3
% Return 11 -5 9
(1 + R1 ) x (1 + R2 ) x (1 + R3 ) =
(1+.11) x (1-.05) x (1 + .09 ) = 1.11 x 0.95 x 1.09
= 1.15 or if you have invested one $ at the
beginning of the period would be worth at the end
year of the three year $1.15
3 year HPR = 1.15
&
3 year HPY = 1.15 1 = 0.15
= 15%

Return On Investment
Question: One year ago, Mr. Seth Cohen
Invested $10,400 in 200 shares of First
Industries Limited stock and just received a
dividend of $600. Today, he sold the 200
shares at $54.25 per share.
a) What was his capital gain?
b) What was his total dollar return?
c) What was his percentage return?
d) What was stock dividend yield?
e) What is HPR?
f) What is HPY?