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Chapter 10.ppt - CHAPTER 10 Risk and Return Lessons from...

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CHAPTER 10 CHAPTER 10 Risk and Return: Lessons from Market History CORPORATE FINANCE 1 (Prof. GOHAR G. STEPANYAN)
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Chapter Outline Chapter Outline 10.1 Returns 10.2 Holding Period Returns 10.3 Return Statistics 10.4 Risk Statistics 10.5 Average Stock Returns and Risk-Free Returns 10.6 More on Average Returns 10.7 Equity Risk Premium: International Perspectives 10.8 Summary and Conclusions 2
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Dollar Returns The sum of the cash received and the change in value of the asset, in dollars. Time 0 1 Initial investment Ending market value Dividends 10.1 Returns 10.1 Returns Percentage Returns The sum of the cash received and the change in value of the asset, divided by the original investment. TOTAL 3
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Dollar Return = Dividend + Change in Market Value yield gains Capital yield Dividend ue market val Beginning ue market val in Change Dividend ue market val Beginning return Dollar return Percentage Returns (cont’d) Returns (cont’d) 4
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Suppose you bought 100 shares of BCE one year ago today at $25. Over the last year, you received $20 in dividends (= 20 cents per share × 100 shares). At the end of the year, the stock sells for $30. How did you do? Quite well. You invested $25 × 100 = $2,500. At the end of the year, you have stock worth $3,000 and cash dividends of $20. Your dollar gain was $520 = $20 + ($3,000 – $2,500). Your percentage gain for the year is: Dividend yield – 0.8% Capital gain – 20% 500 , 2 $ 520 $ % 8 . 20 Returns: Example Returns: Example 5
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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 10.2 Holding Period 10.2 Holding Period Returns Returns 6
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