IF Risk & Return and Portfolio Theory - Lecture

IF Risk & Return and Portfolio Theory - Lecture -...

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Click to edit Master subtitle style  11/6/09  © 2003-2009 Mehmet Yalin Risk & Return and Portfolio Theory
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 11/6/09  © 2003-2009 Mehmet Yalin Chapter 12 ± Some Lessons from Capital Market History 22  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin relationship between risk and return (I ) v An investment’s required return depends on its risk. - There is a reward for bearing risk so return and risk are positively correlated. v Historically, we have observed that - RSTOCKS > RT-BILLS Monthly 1929-2008: 0.53% for S&P 500 vs. 0.30% for T-Bills - RSMALL COMPANIES > RLARGE COMPANIES Monthly 1939-2008: 1.25% for CR vs. 1.04% for GE 33  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin relationship between risk and return (I I ) 44  Chapter 12 1 10 Investment of $1 between March 1986 and February 2009 into. ..
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 11/6/09  © 2003-2009 Mehmet Yalin example 1 on measuring return You bought a 20-year bond with $1,000 face value and 15% coupon rate with annual coupon payments for $1,224.08 exactly a year ago. Currently, the bond is selling for $1,313.57. What is your dollar return over the past year? ( 29 49 . 239 $ 08 . 224 , 1 $ 57 . 313 , 1 $ 150 $ return Dollar = - + = gains Capital income Dividend return Dollar + = 55  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin example 2 on measuring return You bought a common share of a company for $80 exactly a year ago. Over the past year, the company paid $2 a share in dividends. Currently, the stock is selling for $100 a share. What is your percentage return over the past year? % 5 . 27 80 $ 80 $ 100 $ 80 $ 2 $ return Percentage = - + = ( 29 yield gains Capital yield Dividend return Percentage + = HPR 66  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin example 3 on measuring return A company is planning to issue a 5-year bond with $1,000 face value and 10% coupon rate with annual coupon payments at 14% yield-to-maturity now. What is the expected dollar return of this bond over the next year if yield-to-maturity at the time is expected to be 12%? ( 29 ( 29 ( 29 ( 29 ( 29 57 . 176 $ 68 . 862 $ 25 . 939 $ 100 $ return Dollar 25 . 939 $ 12 . 0 1 000 , 1 $ 12 . 0 1 1 1 12 . 0 100 $ 68 . 862 $ 14 . 0 1 000 , 1 $ 14 . 0 1 1 1 14 . 0 100 $ 4 4 1 5 5 0 = - + = = + + + - × = = + + + - × = P P 77  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin example 4 on measuring return A company has just paid $2 per share dividend, which is expected to grow 10% a year forever. The appropriate discount rate is 20% currently; however, it is expected to increase to 25% in one year. What is the expected percentage return of this company’s stock over the next year? ( 29 ( 29 % 682 . 16 22 $ 22 $ 13 . 16 $ 22 $ 20 . 2 $ return Percentage 13 . 16 $ 1 . 0 25 . 0 42 . 2 $ 42 . 2 $ 1 . 0 1 2 $ 22 $ 1 . 0 2 . 0 20 . 2 $ 20 . 2 $ 1 . 0 1 2 $ 1 2 2 0 1 - = - + = = - = = + × = = - = = + × = P D P D 88  Chapter 12
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 11/6/09  © 2003-2009 Mehmet Yalin example 5 on measuring return You bought a share of Microsoft at the closing share price of $29.97 on Friday, November 12, 2004. You sold the share on Monday at the closing share price of $27.39 while the company paid out $0.08 regular and $3 special dividend per share. (a) Ignoring transaction costs, what was your 3-day return? (b) What would be the APR and EAR assuming a 363-day year?
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This note was uploaded on 11/05/2009 for the course BUSFIN 1030 taught by Professor Zutter during the Fall '08 term at Pittsburgh.

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IF Risk & Return and Portfolio Theory - Lecture -...

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