1st letter to friends of Brunei(Total Return and Relative Return)

Dear friends from Brunei,

Thank you for hosting me at your bank's training centre last Friday and Saturday. I am grateful at the opportunity to lecture you on investment planning subject. As promised, I am writing these blogs to help you reinforce the calculation concepts which many of you were concerned about.

Topic 4: The Risks & Returns from investing

There are 2 ways of measuring returns & risks. One is measuring such items OVER A SINGLE PERIOD, the other is measuring them OVER MULTIPLE PERIODS.

a. Returns over a single period

Total Return (TR) = Income + Capital Gain (or Loss)

TR = (Income + Capital Gain (or loss)) / Purchase Price of stock

Relative Return (RR) = 1+ TR

For example:

i. What is the total return for a stock purchased at $36, held for one year during which $4 in Dividends was received, and sold for $30?

a. -5.6%
b. -11.1%
c. -16.7%
d. -27.8%

ii. Suppose you bought shares of ABC Co on 1 Jan for $50 each. Over the year, ABC paid cash dividends of $6.50 per share. On 31 Dec, you sold your shares at $63.50. Calculate the following:

a. Total Return
b. Relative Return

Let's try these 2 exercises, once you got it, you have mastered the concepts of total returns and relative returns over a single period (i.e. for 1 year). The next blog, I will explain measuring returns over multiple periods (i.e. from year 1 to year 5 for example)