Chap012 - Chapter 12 Some Lessons from Capital Market...

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Chapter 12 Some Lessons from Capital Market History
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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 Understand the implications of market efficiency 12-2
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Chapter Outline Returns The Historical Record Average Returns: The First Lesson The Variability of Returns: The Second Lesson More about Average Returns Capital Market Efficiency 12-3
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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 12-4
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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 12-5
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Percentage Returns It is generally more intuitive to think in terms of percentage, rather than dollar, returns Dividend yield = income / beginning price Capital gains yield = (ending price – beginning price) / beginning price Total percentage return = dividend yield + capital gains yield 12-6
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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?
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Chap012 - Chapter 12 Some Lessons from Capital Market...

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