Notes 4-21-08 (CH10, Examples)

Notes 4-21-08 (CH10, Examples) - If low, low risk Risks...

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4/21/2008 Notes CH10 Unique risk – risks that can be decreased by diversifying Market risk – risks that can not be reduced by diversifying, such as Macro problems Rate of return Percentage return = dividend + capital +/- Initial Share Price 1+ real rate of return = 1 + nominal return 1 + inflation rate DJIA – 30 stocks Diversification – strategy designed to reduce risk by spreading your investments or portfolio over numerous securities Standard Deviation = squire root of variance Variance – dispersion, volatility of stocks (returns) If high, high risk
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Unformatted text preview: If low, low risk Risks Example 1 Purchase a stock for $25 per share Sell it 1 year later for $30 After receiving a $1 dividend ROR = 24% Real rate of return = 14.8% Example 2 Average compound rate of return for all common stocks = 12.4% 1900 2000 Risk free rate of return (Treasury bill) = 3.8% Average risk premium = 8.6% Example 3 Stock is projected to sell at $30 in 1 year What price would you be willing to pay for this stock today, If it was expected to pay a $4 per share dividend and your required rate of return is 12% CH11...
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Notes 4-21-08 (CH10, Examples) - If low, low risk Risks...

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