Chap010(WW-FIN357)NT - Chapter 10 Risk and Return Lessons...

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Chapter 10 Risk and Return Lessons  
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10-2 Chapter Outline 10.1 Returns 10.2 Holding-Period Returns 10.3 Return Statistics 10.4 Stock Returns and Risk-Free Returns 10.5 Risk Statistics 10.6 More on Average Returns
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10-3 Key Concepts and Skills Calculate the return on an investment Understand the historical returns and risks on various types of investments Understand the normal distribution Understand the difference between arithmetic and geometric average returns
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10-4 10.1  Returns Dollar Returns the sum of the cash received and the change in value of the asset Time 0 1 Initial investment Ending market value Dividends Percentage Returns the sum of the cash received and the change in value of the asset divided by the original investment.
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10-5 $ Return = Dividend + Change in market value Common Stock Returns yield gains capital yield dividend ue market val beginning price) purchase - price sales ( dividend ue market val beginning return $ return Percentage + = + = =
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10-6 Returns: Example You bought 100 shares of Wal-Mart one year ago at $25 per share. Over the year, you received $20 in dividends (20 cents per share). At the end of the year, the stock sells for $30. Calculate the return on this investment
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10-7 Returns: Example Dollar Return: $520 gain Time 0 1 -$2,500 $3,000 $20 Percentage Return: 20.8% = $2,500 $520
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10-8 10.2 Holding-Period Returns The holding period return is the return that an investor would get when holding an investment over a period of n years, when the return during year i is given as r i : 1 )] 1 ( ) 1 ( ) 1 [( return period Holding 2 1 - + × × + × + = = n r r r
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10-9 Holding Period Return: Example Suppose a $10,000 investment provides the following returns over a four-year period: Year Return 1 10% 2 -5% 3 20% 4 15% % 21 . 44 4421 . 1 ) 15 . 1 ( ) 20 . 1 ( ) 95 (. ) 10 . 1 ( 1 ) 1 ( ) 1 ( ) 1 ( ) 1 ( return period holding Your 4 3 2 1 = = - × × × = - + × + × + × + = = r r r r Ending MV = Beginning MV x (1+HPR) $14,421 = $10,000 x 1.4421
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10-10 Holding Period Return: Example An investor who held this stock for four
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This note was uploaded on 05/10/2008 for the course FIN 357 taught by Professor Hadaway during the Spring '06 term at University of Texas at Austin.

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Chap010(WW-FIN357)NT - Chapter 10 Risk and Return Lessons...

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