From the CFAI book:
“Equation 1 assumes, for simplicity, that any dividend is received at the end of the holding period. More generally, the holding period return would be calculated based on reinvesting any dividend received between t = 0 and t = H in additional shares on the date the dividend was received at the price then available.”
Does it mean any dividends recieved during the holding period is reinvested elsewhere and not part of the equation?
Thanks.
I think that they mean that if you receive dividends during the period, you need a more complicated calculation (IRR) to compute the proper holding period return. So, interim dividends would be reinvested (in the stock, to obtain the stock’s return), but the dividends (and their reinvestment earnings) _ would be _ part of the holding period return.
Now that I come across an example for it, all dividends paid are summed up to obtain Dh. But the Price appreciation part only takes into consideration the new and inital price. So I guess dividends are not assumed to be reinvested as part of the HPR calculation (or at least their earnings are excluded). Or else you would need an additional calculation for the interim dividends recieved and their respective return of stock appreciation at their current market price.
This also assumes that dividend reciepts are large enough to cover the purchase of one or more stock, and holds the ROI constant, similar to IRR.