Handbook of Market Risk

Chapter Three

Return and Volatility Estimates

October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

—Mark Twain

The concept of return may have different acceptations according to investors. When referring about return obtained by an investor on a stock, we usually mean not only the net dividend generated by the stock but also the potential value-add when selling the stock. Therefore, the rate of return comprises the yield obtained by the dividend (net dividend) as well as the value-add or not in capital scaled to the purchase price of the stock.

where R_t is the rate of return of the stock i during period t, D_t is the dividend paid during period t, P_t is the stock price at the end of period t, and P_t-1 is the stock price at the end of the period t − 1.

This formula does not take into account any tax requirements. It is the gross return for the investor. This formula assumes that dividends are paid at the end of each period or that dividends are not reinvested before the end of the period.

Example:

The cumulative return under this method is given ...