Chapter 10 - Chapter 10 Introduction to risk return and the opportunity cost of capital COPYRIGHTZHULI 1 Objectives 1 2 3 4 Estimate the

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COPYRIGHT©ZHULI 1 Chapter 10 Introduction to risk, return, and the opportunity cost of capital
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COPYRIGHT©ZHULI 2 Objectives 1. Estimate the opportunity cost of capital for an “average-risk” project 2. Calculate the standard deviation of return for individual common stocks or for a stock portfolio 3. Understand why diversification reduces risk 4. Distinguish between unique risk, which can be diversified away, and market risk which cannot
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COPYRIGHT©ZHULI 3 Content Rates of return: a review A century of capital market history Measuring risk Risk and diversification Thinking about risk
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COPYRIGHT©ZHULI 4 When investors buy a stock or a bond, their return comes in two forms: (1) A dividend or interest payment and (2) A capital gain or a capital loss
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COPYRIGHT©ZHULI 5 Dividend yield: ±‡ “ ¶ “ Real rate of return: ±‡ “ ¶ “ Nominal rate of return: ±‡ “¶ “ Inflation rate: n & &
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COPYRIGHT©ZHULI 6 Content Rates of return: a review A century of capital market history Measuring risk Risk and diversification Thinking about risk
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COPYRIGHT©ZHULI 7 When you invest in a stock, you don’t know what return you will earn. But by looking at the history of security returns, you can get some idea
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COPYRIGHT©ZHULI 8 Market indexes Financial analysts can’t trace every stock, so they rely on market indexes to summarize the return on different classes of securities Market index : measure of the investment performance of the overall market Dow Jones Industrial Average : index of the investment performance of a portfolio of 30 “blue-chip” stocks : index of the investment performance of a portfolio of 500 large stocks. Also called the S&P 500
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COPYRIGHT©ZHULI 9 The historical record
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COPYRIGHT©ZHULI 10 The safest investment, Treasury bills, had the lowest rates of return. Long-term government bonds gave slightly higher returns than Treasury bills
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This note was uploaded on 05/11/2010 for the course BUSINESS S 409 taught by Professor Terryryan during the Summer '10 term at Winthrop.

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Chapter 10 - Chapter 10 Introduction to risk return and the opportunity cost of capital COPYRIGHTZHULI 1 Objectives 1 2 3 4 Estimate the

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