FINANCE Corporate financial policy and R and D Management

(JNJ), IBM, and DuPont (DD), during the 1998–2003 period. The
monthly stock returns are taken from the Center for Research in Secu-
rity Prices (CRSP) database. A very simple concept is the holding period
return (HPR) calculation, in which one assumes that the stock was pur-
chased at last period’s price and the investor earns a dividend per share
for the current period and a price appreciation (or depreciation) relative
to last period’s price.

where Dt= current period’s dividend
Pt= current period’s stock price
Pt–1= last period’s stock price
HPRt= current period’s holding period return

Let us examine the monthly CRSP stock returns and their correspond-
ing standard deviations of our three stocks for the January 1999–Decem-
ber 2003 period. (See Table 8.1.) The reader notes that Johnson &
Johnson (JNJ) had an average monthly return of .0071 (.71 percent) dur-
ing the January 1999–December 2003 period. One multiplies the average
monthly return by 12 to annualize the JNJ monthly average. The annual-
ized JNJ return was 8.52 percent during the 1999–2003 period, whereas
the corresponding annualized standard deviation is 24.64 percent (the
monthly standard deviation is multiplied by the square root of 12 to an-
nualize the term).
Please note that the calculations of expected returns and standard devi-
ations allow the investor to allocate scarce resources on the basis of his-

HPR

DPP

t P

ttt

t

=

+−−

−

1

1

202 THE USE OF FINANCIAL INFORMATION IN THE RISK AND RETURN OF EQUITY

TABLE 8.1 Monthly CRSP Stock Returns and Corresponding Standard Deviations

Monthly Annualized

Stock Mean Standard Deviation Mean Standard Deviation

DD .0033 .0811 .0396 .2807
IBM .0064 .1107 .0768 .3835
JNJ .0071 .0710 .0852 .2464

Data source:Center for Research in Security Prices.