This preview shows pages 1–11. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 9. Risk and return In these slides, we will address the following questions: How do we measure the expected rewards for holding risky assets? How do we measure risk? What can we say about the riskreward relationship? Returns To talk about capital markets, we first review how to compute returns. When we speak of returns, we always mean holding period returns . Stocks: dividend yield plus capital gain rate Bonds: current yield plus capital gain rate 2 Historical record The historical record suggests that returns earned by different classes of assets have different (statistical) characteristics. 3 Figure Historical asset prices Based on this data, what class of assets has the highest expected return? The lowest? 4 Figure Returns Small cap stocks 5 Figure Returns (continued) Large cap stocks 6 Figure Returns (continued) Longterm US Treasury Bonds 7 Figure Returns (continued) US Treasury Bills 8 Figure Inflation 9 Remarks Investing in risky assets is wellrewarded. Returns on Tbills are small but steady. Longterm bonds do much better than shortterm, espcially after 1980. Returns on small caps are large on average, but highly vari able. The greater the risk, the greater the average return. Although returns are relatively unpredictable from one year to the next (daily returns are even less predictable), they are relatively stable over longer time periods (e.g., 30 years)....
View
Full
Document
This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.
 Fall '07
 DONCHEZ,RO
 Corporate Finance

Click to edit the document details