Given the following information about Stock A:
P0 = $39.50
D1 = $3.25 paid at end of year
D2 = $3.25 paid at end of year
Suppose that you can invest D1 at an annual rate of 5% over the second year and after collecting dividend D2 you sell the stock for $41.75 at the end of year 2.
a. What is your holding period return for the two years?
b. What is the geometric mean annual return?