Lecture 9 Ch 10 UGBA 103 2011

# Lecture 9 Ch 10 UGBA 103 2011 - Chapter 10 Capital Markets...

This preview shows pages 1–18. Sign up to view the full content.

Chapter 10 Capital Markets and the Pricing of Risk

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10- Highlights of Last Lecture Return: Dividend-discount model: Discounted Free Cash Flows Enterprise value = PV(Future Free Cash Flow of Firm) Enterprise value = Equity + Debt - Cash
10- QUIZ QUIZ QUIZ QUIZ QUIZ

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10- Figure 10.1 Value of \$100 Invested at the End of 1925 in U.S. Large Stocks (S&P 500), Small Stocks, World Stocks, Corporate Bonds, and Treasury Bills
10-

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10- Nikkei 225 Index
7 Percentage Returns Discount rates are usually specified in percentage terms, i.e., in terms of per \$ invested. Some Definitions: Percentage Return = Dividend Yield + Capital Gain

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Return calculations--when all dividends are reinvested (Arithmetic) Average Return Geometric Average Return Holding period Return 8 R = R i i = 1 N N R GeometricAve = 1 + R i ( ) i = 1 N 1/ N 1 R HoldingPeriod = 1 + R i ( ) i = 1 N 1
NOT A QUIZ Are arithmetic average stock returns or geometric average stock returns usually higher? A) arithmetic average B) geometric average 9

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10- Arithmetic average returns versus geometric average and holding period returns Suppose you buy a stock for \$10. At the end of year 1, it has paid no dividends and is trading at \$15. What is your return for year one? At the end of year two, the stock has paid no dividends and is trading at \$10. What is your return for year two? R 1 = 15 10 10 = 0.5 = 50% R 2 = 10 15 15 = 0.333 = -33.3%
10- Arithmetic average returns versus geometric average and holding period returns (cont) What is your (arithmetic) average return? What is your geometric average return? Holding period return? R = 0.5 0.33 2 = 0.0833 = 8.33% R geometricAve = 1 + 0.5 ( ) 1 0.33 3 ( ) ( ) 1/2 1 = 0 R HoldingPeriod = 1 + 0.5 ( ) 1 0.33 3 ( ) 1 = 0

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10- 12 Variance One measure (but not the only measure) of the variation in returns. Definition: Variance estimate using realized returns: where Var ( R ) = E R E R ( ) ( ) 2 ( ) Var ( R ) = 1 T 1 R t R ( ) t = 1 T 2 R = 1 T R t t = 1 T