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How do I calculate the annual return for each of the 5 years from monthly historical data? How do I account for stock split and dividends in the year?
I'm not sure if this is the way to calculate.
Simple Dividend-Adjusted Return = (Year end adj close - split adjusted year start adj close) / split adjusted year start adj close)
Annual Dividend-Adjusted Return = (Simple Dividend-Adjusted Return +1) ^ (1 / Years Held) -1
Calculate 2014 annual return.
2014 monthly prices:
Additional points in your question:
** STOCK SPLITS & DIVIDENDS **
Regarding stock splits and dividends, the principle is to compare like for like. If you held 1 share at the start of the period, what would you be holding now?
If the stock has split, for example, so one share has become (say) 3 then you compare the price of one share in Dec'13 to the price of three shares in Dec '14.
If a dividend was paid during the period then the value in Dec'14 would be the value of shares + the value of the dividend.
Then compare the two values as per @d-stanley's answer.
** DIVIDEND RE-INVESTMENT ASSUMPTIONS **
One additional subtlety with dividends: you will have received cash during the couse of the year so we need to make an assumption about how the dividends were re-invested for the remainder of the period.
One common assumption is to assume it was re-invested in the same stock, so for example if received a 25p per share dividend at a time when the (ex-dividend) price was 500p (5% dividend yield) you could hypothetically buy one more share for each 20 you hold. In calculating the return you would compare 1 share in Dec'13 with (1+ dividend yield) shares in Dec'14.
In practice (unless dividend and equity returns are very high) there will not be a big difference in the shorter term between that assumption or just adding the cash value of dividends to the value of one share.
Hope that helps.
(End. Adj. Close - Beg. Adj. Close + Dividends)/Beg. Adj. Close Considering the dividends are paid out, we add the dividends back in the formula? Since adj. close does take away the value of dividends
– lssee
Oct 17 '19 at 7:06
Actually, you would take the Dec '13 adjusted close, not the Jan '14 adjusted close, otherwise you'd leave out one month of returns.
But the formula would be
End. Adj. Close - Beg. Adj. Close
--------------------------------
Beg. Adj. Close
or
End. Adj. Close
--------------- - 1
Beg. Adj. Close
