Market Efficiency: practice question
A quantitative desk runs a momentum screen that ranks stocks by their trailing 12-month total return and buys the highest-ranked names. Over the past year, Kestrel Media shares rose from $18.00 to $24.30 and paid dividends of $0.90 per share. The trailing 12-month total return the screen assigns to Kestrel Media is closest to:
- 35.0%
- 38.7%
- 40.0%
Show answer and explanation
Correct answer: C
Working: Total return = (24.30 - 18.00 + 0.90) / 18.00 = 7.20 / 18.00 = 0.400 = 40.0%.
Explanation: C is correct: the screen ranks on total return, so the $0.90 of dividends joins the $6.30 price gain, ($24.30 - $18.00 + $0.90) / $18.00 = 40.0%, which marks Kestrel Media as a past-year winner that a momentum strategy would buy. A is incorrect because 35.0% is the price-only return ($6.30 / $18.00) and drops the dividends a holder actually received. B is incorrect because 38.7% adds a dividend yield computed on the ending price ($0.90 / $24.30 = 3.7%) to the 35.0% price return; a total return divides the whole payoff, price change plus dividends, by the beginning price.
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