chap12

chap12 - Chapter 12 Chapter 12 Some Lessons from Some...

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Unformatted text preview: Chapter 12 Chapter 12 Some Lessons from Some Lessons from Capital Market History Capital Market History 12-2 FIN 3716 Key Concepts and Skills Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand the historical risks on various types of investments 12-3 FIN 3716 Chapter Outline Chapter Outline Returns The Historical Record Average Returns: The First Lesson The Variability of Returns: The Second Lesson More on Average Returns Capital Market Efficiency 12-4 FIN 3716 Risk, Return and Financial Markets Risk, Return and Financial Markets We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets Lessons from capital market history There is a reward for bearing risk The greater the potential reward, the greater the risk This is called the risk-return trade-off 12-5 FIN 3716 Dollar Returns Dollar Returns Total dollar return = income from investment + capital gain (loss) due to change in price Example: You bought a bond for $950 one year ago. You have received two coupons of $30 each. You can sell the bond for $975 today. What is your total dollar return? Income = 30 + 30 = 60 Capital gain = 975 950 = 25 Total dollar return = 60 + 25 = $85 12-6 FIN 3716 Percentage Returns Percentage Returns It is generally more intuitive to think in terms of percentages than in dollar returns Dividend yield = income / beginning price Capital gains yield = (ending price beginning price) / beginning price Total percentage return = dividend yield + capital gains yield 12-7 FIN 3716 Example Calculating Returns Example Calculating Returns You bought a stock for $35 and you received dividends of $1.25. The stock is now selling for $40. What is your dollar return? Dollar return = 1.25 + (40 35) = $6.25 What is your percentage return?...
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This note was uploaded on 12/14/2010 for the course FIN 3716 taught by Professor Fang during the Fall '10 term at LSU.

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chap12 - Chapter 12 Chapter 12 Some Lessons from Some...

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