Explanation

The holding period return (HPR) is calculated as:

$\text{HPR} = \frac{\text{Dividend} + (\text{Ending Value} - \text{Beginning Value})}{\text{Beginning Value}}\times 100\%$

Given:

• Beginning price = $20
• Expected ending price = $25
• Expected dividend = $1.25

Calculation: $\text{HPR} = \frac{1.25 + (25 - 20)}{20} = \frac{1.25 + 5}{20} = \frac{6.25}{20} = 0.3125 = 31.25\%$

Key Points:

• The holding period return includes both capital appreciation and dividend income
• Last year's dividend ($1) is irrelevant - only the expected dividend during the holding period matters
• The formula correctly captures total return from both price change and dividend income
• The answer is 31.25% (Option C)