returns - Returns Economics 71a: Spring 2007 Lecture notes...

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Returns Economics 71a: Spring 2007 Lecture notes 3.2 (extra)
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Goals Capital gains and income Inflation and real returns Expected or required returns Returns in other currencies
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What is a Return? Stock held from time t to t+1 Pays dividend during this time of d(t+1) Why is this sensible? Increase of 1 dollar after investment t to t+1 R t +1 = P t +1 + d t +1 - P t P t
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Two Parts to a Stock Return = (capital gain) + (dividend yield) R t +1 = P t +1 + d t +1 - P t P t R t +1 = P t +1 - P t P t + d t +1 P t
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Two Parts of a Bond Return = (capital gain) + (Interest) R t +1 = P t +1 + I t +1 - P t P t R t +1 = P t +1 - P t P t + I t +1 P t
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Goals Capital gains and income Real returns Expected or required returns Returns in other currencies
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Real Returns Nominal return Return before inflation adjustment Real return Return after adjusting for inflation
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Real Return (example) $1 in the bank buys how much more bread in the future Nominal Interest Rate = 10% = R
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returns - Returns Economics 71a: Spring 2007 Lecture notes...

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