ch 12 (Capital Market History)

# ch 12 (Capital Market History) - Key Concepts and Skills...

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Chapter 12 Some Lessons from Capital Market History Slide 12 - 1 Key Concepts and Skills ± Understand, and know how to calculate, the return on an investment ± Understand the historical returns and risks on various types of investments ± Understand capital market efficiency Slide 12 - 2 ± Returns in Financial Markets z Financial markets provide us with information about the returns that are required for various levels of risk. z We examine returns in the financial markets to help us determine the appropriate returns on non-financial assets. ± Lessons from Capital Market History z There is a reward for bearing risk. z The greater the potential reward, the greater the risk. This is called the risk-return trade-off. Risk, Return and Financial Markets Slide 12 - 3 ± Total Dollar Return Total dollar return = Income from investment + Capital gain or loss due to change in stock price ± Percentage Return It is more intuitive to think in terms of percentages than in dollar returns: Total percentage return = Dividend yield + Capital gains yield Dividend yield = Income / Beginning price Capital gains yield =(Ending price – Beginning price)/Beginning price Computing Stock Returns 1 1 1 1 1 + = + = t t t t t t t t t t P D P P P P D P P R

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Slide 12 - 4 Example : 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? What is your percentage return? Dollar return = 1.25 + (40 – 35) = \$6.25 Dividend yield = 1.25 / 35 = 3.57% Capital gains yield = (40 – 35) / 35 = 14.29% Total percentage return = 3.57 + 14.29 = 17.86% Computing Stock Returns Slide 12 - 5 Historical Returns
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ch 12 (Capital Market History) - Key Concepts and Skills...

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