Busn&FinCh10 - Lessons From Capital Market History:...

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Click to edit Master subtitle style 9/9/11 Lessons From Capital Market History: Chapter 10 11
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9/9/11 Topics Calculate 1 Period Returns Five Important Types of Financial Investments Risk-Free Investment What We Can Learn From Capital Market History Using Past To Predict Future Average Returns: There Is Reward For Bearing Risk Variability In Returns: The Greater The 22
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9/9/11 1 Year Percent Return Dividend Yield Capital Gains Yield 33
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9/9/11 Period Returns = Holding Returns = 1 Year Returns On Investment For 1 Year (Holding Period Return) (Regardless of whether you sell the stock or not) Stock Price Time 0 = (Beg) = P t $25.00 Stock Price Time 1 = (End) = P t+1 $19.50 Dividend Paid at Time 1 = D t+1 $2.00 Capital Gain = P t+1 - P t -$5.50 Dollar Returns = Dividend Paid + Capital Gain -$3.50 % Return = (Dollar Return)/(End Stock Price) -14.00% Dividend Yield = D t+1 /P t 8.00% Capital Gain Yield = P t+1 /P t - 1 -22.00% % Return = Dividend Yield + Capital Gain Yield -14.00% % Return + 1 = (D t+1 + P t+1 )/P t 86.00% Returns On Investment For 1 Year (Holding Period Return) (Regardless of whether you sell the stock or not) Stock Price Time 0 = (Beg) = P t $25.00 Stock Price Time 1 = (End) = P t+1 $26.00 Dividend Paid at Time 1 = D t+1 $2.00 Capital Gain = P t+1 - P t $1.00 Dollar Returns = Dividend Paid + Capital Gain $3.00 % Return = (Dollar Return)/(End Stock Price) 12.00% Dividend Yield = D t+1 /P t 8.00% Capital Gain Yield = P t+1 /P t - 1 4.00% % Return = Dividend Yield + Capital Gain Yield 12.00% % Return + 1 = (D t+1 + P t+1 )/P t 112.00% 44
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9/9/11 Five Important Types of Financial Roger Ibbotson & Rex Sinquefield did famous study that looked at the nominal- pretax-returns for five important types of financial investments in US markets during the period 1926 - 2008: 1. Large Company Stocks Portfolio based on S & P 500 Index (in terms of MV of outstanding stock) 2. Small Company Stocks Portfolio based on smallest 20% of companies listed on NYSE (in terms of MV of outstanding stock) 55
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9/9/11 US Capital Market History Looking at the past can perhaps provide some insight into the future. Using the past to predict the future can be dangerous if the past isn’t representative of what the future will bring. 2000 to 2007 people around the world looked at past house prices to predict future house prices. 66
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9/9/11 U.S. Financial Markets The Historical Record: 1925-2008 77
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9/9/11 Year-to-Year Total Returns Large-Company Stock Returns 88
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9/9/11 Year-to-Year Total Returns Long-Term Government Bond Returns 99
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9/9/11 Year-to-Year Total Returns U.S. Treasury Bill Returns 1010
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9/9/11 Year To Year Returns (Hand typed from tables in textbook) Year Large Company Stocks Down Large Company Stocks Long Term Government Bonds Down Long Term Government Bonds US Treasury Bills Consumer Price Index 1926 11.14% 7.90% 3.30% -1.12% 1927 37.13% 10.36% 3.15% -2.26% 1928 43.31% -1.37% -1.37% 4.05% -1.16% 1929 -8.91% -8.91% 5.23% 4.47% 0.58% 1930 -25.26%
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Busn&FinCh10 - Lessons From Capital Market History:...

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