• This measures the return you expect from a stock in 1 year.
• It combines dividends and the increase in the stock price.

• Example:
  • Dividend = 4 pesos
  • Expected Price= 52
  • Current Price= 48
    • Price increase =52 (expected price) - 48 (current price) = 4 pesos
    • Total return = 4+4divide48
    • = 16.7%

FORMULA:

Expected HPR = = E(D₁) + [E(P₁) – P₀] / P₀

Expected HPR = E(r) = 4 + (52-48) / 48 = .167 = 16.7%

1st: EP minus CP= TOTAL PRICE INCREASES

2nd: Dividend plus Price Increases divide Current Price

Note that:

E() denotes an expected future value. E(P₁) represents expectation today of the stock price one year from now.

E(r) is referred to as the stock’s expected holding-period return.

It is the sum of expected dividend yield, E(D ₁ ) / P ₀ , and the

expected rate of price appreciations, the capital gains yield, [E(P ₁ ) – P ₀ ] / P ₀ .

Expected Holding-Period Return (HPR):

• This calculates how much return you should expect based on the stock's risk.
• If the expected return is higher than the required return, the stock offers more return for its risk, so it’s a good investment.

Formula: k=rf+β×(E(rm)−rf)k=rf​+β×(E(rm​)−rf​)

• Risk-free rate (rfrf​) = 6%
• Market risk premium = 5%
• Stock risk (ββ) = 1.2
• Required return = k=12%k=12%.