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# powerpoint - Chapter 1 McGrawHill/Irwin A Brief History of...

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Chapter McGraw-Hill/Irwin 1 A Brief History of Risk and Return

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1-2 Summary Our goal in this chapter is to see what financial market history can tell us about risk and return. Dollar Returns and Percent Returns The Historical Record Average Returns Return Variability Arithmetic Averages versus Geometric Averages Risk and Return Trade-off There are two key observations First, there is a substantial reward, on average, for bearing risk. Second, greater risks accompany greater returns.
1-3 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. Example: Loss) (or Gain Capital Income Dividend Stock a on Return Dollar Total + =

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1-4 Example: Calculating Total Dollar 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, for each share, you received a \$2 dividend. What was your total dollar return? – \$1,000 / \$25 = 40 shares – Capital gain: 40 shares times (\$35 - \$25) = \$400 Dividends: 40 shares times \$2 = \$80 – Total Dollar Return is \$400 + \$80 = \$480
1-5 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. Example, you buy a share of stock: ) 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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1-6 Example: Calculating 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, for each share, you received a \$2 dividend. What was your total percent return? – Dividend yield = \$2 / \$25 = 8% Capital gain yield = (\$35 \$25) / \$25 = 40% Total percent return = 8% + 40% = 48% OR – Total percent return = \$480 / \$1000 = 48%
Annualizing Returns, I. You buy 200 shares of Lowe’s Companies, Inc. at \$48 per share.

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powerpoint - Chapter 1 McGrawHill/Irwin A Brief History of...

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