Holding Period Return/Yield

A holding period is the time that an investor keeps their investment, especially the period between the purchase or sale of any security. The holding period refers to the time between the initial purchase and subsequent sale of an asset in a long position. In a short position, however, the holding period refers both to the time a short seller decides to repurchase their shares or buy them back, and when the security is delivered to its lender, thus closing the short position.

When it comes to analysing one's portfolio, investing uses the acronym HPR. HPR stands for holding period return. This article will explain how to calculate HPR and how it can be used for determining the holding period return.

What is a holding period return?

The yield or period of holding is the return on assets held over a long period. It is usually expressed as a percentage. The holding period returns are calculated. The total returns of either the asset/portfolio are used to calculate the holding period return. It is calculated by taking into account the income and any changes in value of the asset/portfolio. When comparing returns from investments held over different periods of time, Holding or Return Yield is a common term.

Formula for Holding Period Yield

Online calculators for HPR allow you to instantly see your annualized holding period returns by clicking a button. The formula for calculating HPR will help you better understand what it means. Here is the formula for holding period:

HPR = [Income + End of Period Value -- Initial Valu]/ Initial Value

All returns computed for regular time periods, such as quarters, half-years or years, can also be converted according to their holding period return.

The holding period return, which is usually expressed in percent value, is the total return received from holding assets or individual assets over a given period. This can be calculated by adding the total returns to the portfolio or asset, including income changes. When comparing the returns of investments held over different periods, holding period yield can be very helpful.

Example of Holding Period Yield

The holding period determines tax implications. It starts on the day following the security's acquisition, and continues onward until the day of the security's sale or disposal. Take the following example: Sunil bought 100 shares of X stock in January 2016. He continued to count her holdings and began counting January 3, 2020. No matter how many days a month contained, the third day after that was considered valid.

Let's say Sunil sold his stock December 12, 2020. Sunil would have to make a short-term capital gain, or lose, as his holding period was shorter than one year. Sunil would then have to deal long-term capital gains or losses if he had held on to his stock for another month, and sold his stock after the 3rd of January 2021.

Calculator for HPR

You can find online calculators for HPR, but this formula is easy enough to calculate HPR by yourself. Use the following examples to determine HPR.

First, suppose an investor bought shares in a stock one year ago for Rs50, and received dividends of Rs5 over the year. What will the HPR be, if the stock trades at Rs60?

HPR= [5+60-50] / 50=30

Therefore, HPR for this particular period will be 30%

Take the following as a second example. HPR can be used to determine which investment performed better over the same period. Let's suppose fund X grew from Rs100 to R150 over three years, while paying an investor Rs5 in Dividends. Alternately, you can find Y, which went from Rs200 to Rs320 in four years while producing dividends of Rs10.

HPR for X = [5 + 150-100]/ 100 = 55%

HPR for Y = [10+ (320-200),] / 200 = 65%

Fund Y appears to have outperformed fund X in terms of its holding period. Important to mention that fund Y was held for a total of four years, which contributed to the higher HPR than fund. We also have to mention the drawback of holding-period yield. It is a great metric for gaining insight into one's returns over a specific period. However, it can be difficult to use when comparing returns across different holding periods. Annualized holding period yield or annualized holding period return can be used to determine which fund performed better, even though they have different holding periods.

The annualized holding period yield for both funds X and Y is calculated to compare them, while also adjusting for the holding period. Fund X's annualized holding period yield was 15.73% while fund Y's yield was 13.34%. Fund Y's annualized holding period yield was lower than fund X, despite having a higher HPR.