Types of Return: Holding Period Return (HPR)

Holding Period Return (HPR) is a straightforward metric that measures the total return generated by an investment over the specific period it was held.

• Definition:

  • Holding Period Return (HPR) measures the total percentage gain or loss on an investment during the period the investment was held. It captures all income received and any appreciation or depreciation in the asset's value. The length is irrelevant. An HPR tells the investor how much the investment’s worth has shifted.

• Formula (as provided):

  HPR = (Income + (Ending Price - Beginning Price)) / Beginning Price * 100
  

• Components Explained:

  • Income: This is the income the investor receives during the holding period. This is calculated as the sum of all dividends, interest, etc.

  • Ending Price: The market value of the asset at the end of the holding period.

  • Beginning Price: The market value of the asset at the start of the holding period.

• Utility (as provided):

  • Helps investors assess gains/losses over the holding period. It provides a simple and direct measure of the investment's performance.

• Further Elaboration on Utility:

  • Easy Calculation: It is easy to compute.
  • Versatile Utility: Provides a single percentage that tells the investor how much value the instrument has generated.
  • Short time horizons can be computed to understand short-term performance.

• Limitations:

  • Doesn't account for compounding - HPR does not show if returns were in compounding time periods such as years.

  • HPR is not effective when timeframes are varied: Comparing HPRs across instruments that are held in drastically different periods provides little insight. A year’s time HPR and a thirty year’s time HPR can not be effectively compared.

  • HPR does not convey the level of risk - a great advantage that it yields, that one cannot assess how much risk was needed to arrive at the figure.

• Example:

  • A stock is purchased for Rs. 100 on Jan 1, 2023. After one year, it paid out Rs. 10 of dividends and trades for Rs. 115.

  • In this case, HPR = ( 10 + ( 115 - 100 )) / 100 * 100 = 25%

Key Points:

• The HPR has a number of advantages but many investors need more information than this.
• It's best used for comparing the performance of different investments held for the same period, use it with care when comparing those held for different periods of time.
• Also be sure to compare it against other information!

In conclusion, HPR provides a quick and easy way to assess the total return on an investment over a specific period. However, it's crucial to understand its limitations and to use it in conjunction with other performance measures to get a more complete picture.