Realized Rate of Return

Realized rate of return is merely how much money you

gained or lost by holding onto investments or stocks
for a year , month or quarter .
To calculate it, add the rice at the end of the year
month or quarter to the amount of the dividends you
received and subtract the stock`s price at the beginning
of the year month or quarter.
Used to express annual returns as a percentage (%) of
your investments, making comparison easy.
You can used realized rate or return to help gauge the
performance of vastly different stocks.
The formula can be simplified as follows:
P = RFC1 + RFC2 + . . . RFCn
(1 + r)1 (1 + r)2 (1 + r)n
Where:
RFC = Realized cash flow in period t(t=1, . . .,n)
r = Realized rate of return on a security
If the realized rate of return (r) is greater than the required rate of return (r),
the
market participant actually earned more than was needed to be compensated
for
the expected risk of investing in the security.
If the realized rate of return is less than the required rate of return, the market
participant actually earned less than the interest rate required to compensate
for the risk
involved.
SAMPLE PROBLEM 1C: Application of
Realized Rate of Return
A Walmart bond you purchased two years ago for
$890 is now selling for $925. The bond paid $100
per year in coupon interest on the last day of each
year (the last payment made today). You intend to
hold the bond for four more years and project that
you will be able to sell it at the end of year 4 for
$960. You also project that the bond will continue
paying $100 in interest per year.
890 = 100 + 100 + 925 r = 13.08%
(1 + r)1 (1 + r)2
In order to get r, we should use interpolation method.

Interpolation Method
-used to estimate unknown price or potential yield.
And also, it is used if there are cases where the
unknown rate of the formula is identical (for
scientific calculators)
High and Low Method (for ordinary calculators)
Interpolation Method (for scientific calculators)
Using your scientific calculator perform the ff. steps:
Type the purchase price which is 890 (based on problem 1)
After, Press the shift and CALC keys and then input the following
given numbers:
P= RCF1 + RCF2
(1 + r)1 (1 + r)2
= 100 + 100 + 925
(1 + x)1 (1 + x)2
Note: Change (r) to x

Then, press Shift and CALC

Last, press = keys and viola! You will have the answer of your
realized rate of return (r).
High and Low Method (for ordinary calculators)
First is let`s do a trial and error method where you have to
find the highest interest that would give you an answer closer
to 890. So, in our case 14% is the highest rate that would give
us an answer closer to 890.
P= RCF1 + RCF2 ....
(1 + r)1 (1 + r)2
Change (r) to x
P= 100 + 100 + 925
(1 + x)1 (1 + x)2
Let x be 14%

= 100 + 100 + 925

(1 + 14%)1 (1 + 14%)2
= 87.71929 + 788.7042
= 876.4235
Next step, let`s also find the lowest interest that would give
an answer that is still closer to 890. And in our case, the
lowest interest is 13%. Do the same process in the first step.
P= 100 + 100 + 925
(1 + x)1 (1 + x)2
Let x be 13%

= 100 + 100 + 925

(1 + 13%)1 (1 + 13%)2
= 88.4956 + 802.7253
= 891.2209
Next, Compare the two answers and identify which of the has the
highest answer and which of it has the lowest answer. Based on the
problem, 13% yields the highest answer which is 891.2209 and
14% is the one who yields the lowest answer which is 876.4235.
Substitute these answers to the formula given below:
(H-x)
H-L
And let x be the purchase price which is 890.
H=891.2209
L=876.4235
(891.2209-890)
891.2209-876.4235
= 1.2208
14.7974
=0.08250
Next step is to find the difference between the percentage you used. In
our case, we used 13% and 14%.
14% - 13% = 1
Multiply the your previous answer which is 0.0825 to 1 which is the
difference of the percentages you used.
0.0825 x 1 = 0.0825
After, identify between the two percentages you used which of it is the
lowest one. In our case, 13% is the lowest.
Then, add 13 to your latest answer which is 0.0825 (0.0825x1= 0.0825)

0.0825 + 13 = 13.0825
And the Voila! We now have our (r)

r= 13.0825

Note: Your answer may differ depending on the intervals used especially the moment we were
finding the difference of the two percentages we were using. To have closer to the exact answer given
by interpolation method, we can used smaller intervals. Example, instead of using 14%-13% which
equated to 1, we can use 14%-13.5% that will equate to 0.50. But usually, we maintain to have
intervals of 1 for the purpose of uniformity.
Thank
You!