A “QWEST” for Returns
Suppose you buy some stock in Qwest (no, that’s not a typo, that’s how the company spells it) at a price of $8 per share. Four months later, you sell it for $8.40. No dividend is paid. What is your annualized return on this investment?
For the four month holding period, your return is:
Percentage return = (Pt+1 Pt ) / Pt = ($8.40 $8) / $8 = .05 = 5%
There are three four month periods in a year, so the annualized return is:
1 + EAR = (1 + holding period percentage return)m = (1 + .05)3 = 1.1576 Subtracting the one, we get an annualized return of .1576, or 15.76 percent.