Holding Period Return/Yield

What Is the Holding Period Return/Yield?

Holding period return is the total return received from holding an asset or portfolio of assets over a period of time, known as the holding period, generally expressed as a percentage. Holding period return is calculated on the basis of total returns from the asset or portfolio (income plus changes in value). It is particularly useful for comparing returns between investments held for different periods of time.

The Formula for Holding Period Return Is

Holding Period Return (HPR) and annualized HPR for returns over multiple years can be calculated as follows:

Holding Period Return \begin{aligned}&\textit{Holding Period Return}\\&\qquad=\frac{\textit{Income }+(\textit{End Of Period Value }-\textit{ Initial Value})}{\textit{Initial Value}} \end{aligned} Holding Period Return

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

Understanding Holding Period Return

Holding period return is thus the total return received from holding an asset or portfolio of assets over a specified period of time, generally expressed as a percentage. Holding period return is calculated on the basis of total returns from the asset or portfolio (income plus changes in value). It is particularly useful for comparing returns between investments held for different periods of time.

Starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications. For example, Sarah bought 100 shares of stock on Jan. 2, 2016. When determining her holding period, she begins counting on Jan. 3, 2016. The third day of each month after that counts as the start of a new month, regardless of how many days each month contains.

If Sarah sold her stock on December 23, 2016, she would realize a short-term capital gain or capital loss because her holding period is less than one year. If she sells her stock on Jan. 3, 2017, she would realize a long-term capital gain or loss because her holding period is more than one year.

Example of Holding Period Return/Yield

The following are some examples of calculating holding period return:

1. What is the HPR for an investor, who bought a stock a year ago at $50 and received $5 in dividends over the year, if the stock is now trading at $60?

H P R = 5 + ( 6 0 − 5 0 ) 5 0 = 3 0 % \begin{aligned}HPR=\frac{5+(60-50)}{50}=30\%\end{aligned} HPR=505+(60−50)=30%

2. Which investment performed better: Mutual Fund X, which was held for three years and appreciated from $100 to $150, providing $5 in distributions, or Mutual Fund B, which went from $200 to $320 and generated $10 in distributions over four years?

HPR for Fund X = 5 + ( 1 5 0 − 1 0 0 ) 1 0 0 = 5 5 % \begin{aligned}&\textit{HPR for Fund X}=\frac{5+(150-100)}{100}=55\%\\[+.010pt]&\textit{HPR for Fund B}=\frac{10+(320-200)}{200}=65\%\end{aligned} HPR for Fund X=1005+(150−100)=55%

Note: Fund B had the higher HPR, but it was held for four years, as opposed to the three years for which Fund X was held. Since the time periods are different, this requires annualized HPR to be calculated, as shown below.

3. Calculation of annualized HPR:

Annualized HPR for Fund X = ( 0 . 5 5 + 1 ) 1 / 3 − 1 = 1 5 . 7 3 % Annualized HPR for Fund B \begin{aligned}&\textit{Annualized HPR for Fund X}\\&\qquad=(0.55+1)^{1/3}-1=15.73\%\\&\textit{Annualized HPR for Fund B}\\&\qquad=(0.65+1)^{1/4}-1=13.34\%\end{aligned} Annualized HPR for Fund X=(0.55+1)1/3−1=15.73%Annualized HPR for Fund B

Thus, despite having the lower HPR, Fund X was the superior investment.

4. Your stock portfolio had the following returns in the four quarters of a given year: +8%, -5%, +6%, +4%. How did it compare against the benchmark index, which had total returns of 12% over the year?

HPR for your stock portfolio = [ ( 1 + 0 . 0 8 ) × ( 1 − 0 . 0 5 ) × ( 1 + 0 . 0 6 ) × ( 1 + 0 . 0 4 ) ] \begin{aligned}&\textit{HPR for your stock portfolio}\\&\qquad=[(1+0.08)\times(1-0.05)\times(1+0.06)\times(1+0.04)]\\&\qquad\quad-1=13.1\%\end{aligned} HPR for your stock portfolio=[(1+0.08)×(1−0.05)×(1+0.06)×(1+0.04)]

Your portfolio, therefore, outperformed the index by more than a percentage point. (However, the risk of the portfolio should also be compared to that of the index to evaluate if the added return was generated by taking significantly higher risk.)