Chapter9nt[1]

# Chapter9nt[1] - Chapter 9 Characterizing Risk and Return 1...

This preview shows pages 1–9. Sign up to view the full content.

1 Chapter 9 Characterizing Risk and Return

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

View Full Document
2 Chapter 9 Learning Goals LG1: Compute an investment’s dollar and percentage return LG2: Find information about the historical returns and volatility for the stock, bond, and cash markets LG3: Measure and evaluate the total risk of an investment using several methods LG4: Recognize the risk / return relationship and its implications LG5: Plan investments that take advantage of diversification and its impact on total risk LG6: Find efficient and optimal portfolios LG7: Compute a portfolio’s return
3 Introduction The relationship between risk and return is fundamental to finance theory You can invest very safely in a bank or in Treasury bills. Why would you invest in risky stocks and bonds? If you want the chance of earning higher returns, it requires that you take on higher risk investments There is a positive relationship between risk and return

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

View Full Document
4 Historical Returns Computing Returns Dollar Return = (Capital gain or loss) + Income = (Ending Value – Beginning Value) + Income We can convert from dollar returns to percentage returns by dividing by the Beginning Value
5 Percentage Returns Value Beginning Income Value Beginning - Value Ending Return Percentage + =

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

View Full Document
6 Let’s assume we are considering an investment in stock. The income piece of this equation would be in the form of dividends. We can break this equation into two parts to reflect the capital gains yield and the dividend yield Price Beginning Dividend Price Beginning Price Beginning - Price Ending Return Percentage + = Yield Divident Yield Gains Capital Return Percentage + =
7 Example: You held 250 shares of Hilton Hotel’s common stock. The company’s share price was \$24.11 at the beginning of the year. During the year, the company paid a dividend of \$0.16 per share, and ended the year at a price of \$34.90. What is the dollar return, the percentage return, the capital gains yield, and the dividend yield for Hilton?

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

View Full Document
8 Dollar return = 250 x (\$34.90-\$24.11+\$0.16) = \$2,737.50 Percent return = (\$34.90-\$24.11+\$0.16)/\$24.11 = 45.42% Capital gains yield = (\$34.90 - \$24.11)/\$24.11 = 44.75% Dividend yield = \$0.16/\$24.11 = 0.66% Want to look at another example on computing returns? See Interactive Example 9.1 (move the cursor to the highlight area, right click your mouse and click Open Hyperlink) You can view interactive examples in other formats at http://highered.mcgrawhill.com/sites/0073382256/student_view0/chapter9/interactive_examples.html
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/20/2011 for the course FIN 500 taught by Professor Yi during the Spring '10 term at CSU Dominguez Hills.

### Page1 / 32

Chapter9nt[1] - Chapter 9 Characterizing Risk and Return 1...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online