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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
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
