12Some Lessons from Capital Market HistorySlide 12 - 1Key Concepts and SkillsUnderstand, and know how to calculate, the return on an investmentUnderstand the historical returns and risks on various types of investmentsUnderstand capital market efficiency
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Slide 12 - 2Returns in Financial MarketszFinancial markets provide us with information about the returns that are required for various levels of risk.zWe examine returns in the financial markets to help us determinethe appropriate returns on non-financial assets.Lessons from Capital Market HistoryzThere is a reward for bearing risk.zThe greater the potential reward, the greater the risk. This is called the risk-return trade-off.Risk, Return and Financial MarketsSlide 12 - 3Total Dollar ReturnsTotal dollar return= Income from investment + Capital gain (or loss) due to change in pricePercentage ReturnsIt is more intuitive to think in terms of percentages than in dollar returns.Dividend yield = Income / Beginning priceCapital gains yield =(Ending price – Beginning price)/Beginning priceTotal percentage return= Dividend yield + Capital gains yieldComputing Stock Returns