3531Week1W11 - Week 1 Part I A Brief History of Risk and...

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1 Week 1 Part I A Brief History of Risk and Return • Who Wants to Be a Millionaire? • Returns • Return Variability • Arithmetic versus Geometric Returns • The Historical Record
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McGraw-Hill Ryerson Limited 2 Who Wants To Be A Millionaire? Assume: You invest $300 per month. Your investments earn 9% per year.
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McGraw-Hill Ryerson Limited 3 Who Wants To Be A Millionaire? You trade, or "turn-over" 20% of your investments each year. The federal and provincial governments take about 30% of your investment earnings each year. – If inflation is zero, it will take you about 41 years. • However, if inflation is 3% per year, it will take you about 60 years.
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4 Who Wants To Be A Millionaire? • Suppose you decide to take advantage of deferring taxes on your investments and – You invest $300 per month. – Your investments earn 9% per year. • If inflation is zero, it will take you about 36 years. • If inflation is 3%, it will take you about 49 years.
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McGraw-Hill Ryerson Limited 5 Who Wants To Be A Millionaire? You can cut 49 years to 31 years, IF you invest $500 per month at 12%. Over the last 25 years, the S&P/TSX Index return was about 12%
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McGraw-Hill Ryerson Limited 6 A Brief History of Risk and Return • What can financial market history tell us about risk and return? • Two key observations: –There is a reward for bearing risk. –Greater returns accompany greater risks.
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McGraw-Hill Ryerson Limited 7 Dollar Returns Total dollar return is the return on an investment measured in dollars, accounting for all interim cash flows and capital gains or losses. Loss) (or Gain Capital Income Dividend Stock a on Return Total
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McGraw-Hill Ryerson Limited 8 Percent Returns Total percent return is the return on an investment measured as a percentage of the original investment. The total percent return is the return for each dollar invested.
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McGraw-Hill Ryerson Limited 9 Percent Returns ) Investment Beginning (i.e., Price Stock Beginning Stock a on Return Dollar Total Return Percent or Price Stock Beginning Loss) (or Gain Capital Income Dividend Stock a on Return Percent
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McGraw-Hill Ryerson Limited 10 Total Dollar and Total Percent Returns Suppose you invested $1,000 in a stock with a share price of $25. After one year, the stock price per share is $35. Also, you received a $2 dividend per share. What was your total dollar return?
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McGraw-Hill Ryerson Limited 11 Total Dollar and Total Percent Returns What was your total percent return? Dividend yield = Capital gain yield = Total percentage return =
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McGraw-Hill Ryerson Limited 12 A $1 Investment in Different Portfolios,1983-2007 A $1 Investment in Different Types of Portfolios 0 2 4 6 8 10 12 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year Dollar Inflation SP/TSX T-Bill
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3531Week1W11 - Week 1 Part I A Brief History of Risk and...

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