Holding Period Return (HPR)
Calculation of Holding Period Return
Calculation of Holding Period Return:
The formula for calculating HPR is:
HPR = (( Ending Value + Income) / Beginning Value ) − 1
Beginning Value: The initial value of the investment at the start of the holding period.
Ending Value: The final value of the investment at the end of the holding period.
Income: Any additional income generated from the investment during the holding period, such as dividends or interest.
Significance of Holding Period Return:
Performance Measurement: HPR is a critical tool for assessing the success or failure of an investment over a specific duration.
Comparative Analysis: It enables comparison between different investment opportunities to evaluate their relative returns.
Investment Decision-Making: Helps investors make informed decisions based on historical performance and potential future outcomes.
Risk Assessment: Provides insights into the volatility or stability of an investment.
Interpretation of Holding Period Return:
Positive HPR: A positive HPR indicates a gain on the investment over the holding period.
Negative HPR: A negative HPR suggests a loss on the investment during the holding period.
Limitations of Holding Period Return:
Time Frame: HPR does not factor in the specific timing of returns, which may impact the actual return experienced by the investor.
Exclusion of Costs: It does not consider transaction costs, taxes, or inflation, which can significantly affect an investment’s actual return.
What is the ideal holding period for calculating HPR?
How does HPR differ from Annualized Return?
HPR calculates return over a specific period, while Annualized Return considers the average annual return over a multi-year period.
Can HPR be negative?
Yes, a negative HPR indicates a loss on the investment over the holding period.