Rate of Return on Securities
rate of return on a security is a major factor associated with evaluating
and selecting an investment. All
security-pricing models involve computing the present values of future
cash flows the security is expected to pay.
For common stocks, cash flows represent periodic cash dividends.
For bonds, cash flows represent periodic coupon payments plus the
face value of the bond at maturity.
methods are available for computing the rate of return on a security.
The single-period rate of return is one such measure.
This rate is the percentage price appreciation plus the percentage
cash return (current yield on a bond; dividend yield on a stock) during
a given period. The rate is
typically expressed as an annualized value.
The single-period rate of return can be computed using the following
Return during the period ending at date,
equation can also be used to measure future expected single-period returns.
The symbol "E" is used to mean expected return, price, etc.
The following data can be used to illustrate the computation of
the actual rate of return on a stock and the expected rate of return on
year's actual rate of return on the stock:
returns for the coming year would be:
LEOPOLD A., Financial Statement Analysis, Irwin,