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. It is generally expressed as a percentage and is particularly useful for comparing returns on investments purchased at different periods in time.
Key Takeaways
- Holding period return (or yield) is the total return earned on an investment during the time that it has been held.
- A holding period is the amount of time theinvestment is held by an investor, or the period between the purchase and sale of a security.
- Holding period return is useful for making like comparisons between returns on investments purchased at different periods in time.
Understanding Holding Period Return
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, 2023. When determining her holding period, she begins counting on Jan. 3, 2023. 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 Dec. 23, 2023, she would realize a short-term capital gain orcapitallossbecause her holding period is less than one year. If she sells her stock on Jan. 3, 2024, she would realize a long-term capital gain or loss because her holding period is more than one year.
Calculating Holding Period Return
Holding Period Return (HPR) and annualized HPR for returns over multiple years can be calculated as follows:
HoldingPeriodReturn=InitialValueIncome+(EndOfPeriodValue−InitialValue)
Returns computed for regular time periods such as quarters or years can be converted to a holding period return as well.
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?
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?
HPRforFundX=1005+(150−100)=55%HPRforFundB=20010+(320−200)=65%
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:
AnnualizedHPRforFundX=(0.55+1)1/3−1=15.73%AnnualizedHPRforFundB=(0.65+1)1/4−1=13.34%
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?
HPRforyourstockportfolio=[(1+0.08)×(1−0.05)×(1+0.06)×(1+0.04)]−1=13.1%
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.)
Is Holding Period Return the Same as Rate of Return?
Pretty much, yes. The rate of return tells us, in percentage terms, how much an investment made or lost. The holding period return does the same thing, telling us the return on an investment during the timeframe it was held.
Why Do We Need Holding Period Return?
Holding period return is important for several reasons. It considers not only appreciation but also income payments and is a great way to compare the performance of investments held over different timeframes.
What Does Holding Period Mean?
Holding period means the time a security was held for. It begins when the investment is purchased and ends when it is sold.
Can Holding Period Return Be Negative?
Yes. Not all investments generate a profit. Even a stock that pays a dividend could deliver a negative holding period return if it depreciated in value.
The Bottom Line
A holding period return is the total return you received from holding an asset or collection of assets. You essentially subtract the price you initially paid from the price you sold the security, add any income paid, and then divide the sum by the initial value. The holding period of return is usually expressed as a percentage, meaning you then multiply the total by 100.
Knowing the holding period return makes it easier to compare returns between investments. That’s especially the case for investments held for different periods of time.
