FIN351_Chapter11

FIN351_Chapter11 - Chapter 11 Introduction to Risk, Return,...

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1 Chapter 11 Introduction to Risk, Return, and the Opportunity Cost of Capital Where does the discount rate come from?
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2 Topics Covered Rates of Return: A Review A Century of Capital Market History Measuring Risk Risk & Diversification
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3 Rate of Return Percentage Return = Capital Gain + Dividend Initial Share Price Price Share Initial Dividend = Yield Dividend Price Share Initial Gain Capital = Gain Capital Percentage
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4 Rate of Return Example Suppose you bought the stock of GE at the beginning of 2007 when its price was $31.12 a share. By the end of the year the value of that investment had appreciated to $36.59. In addition, in 2007 GE paid a dividend of $0.82 a share.
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5 Rate of Return The percentage return on your investment is The dividend yield is The percentage capital gain is 20.2% or .202 = 31.12 .82 5.47 = Return Percentage + % 2.6 or 026 . 31.12 0.82 = Yield Dividend = % 17.6 or 176 . 31.12 5.47 = Gain Capital Percentage =
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Rate of Return Nominal vs. Real Example Suppose in 2007 inflation was 3.3%, what is the real rate of return on GE stock? rate
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FIN351_Chapter11 - Chapter 11 Introduction to Risk, Return,...

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