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Unformatted text preview: 11SummaryOur goal in this chapter is to see what financial market history can tell us about risk and return.Dollar Returns and Percent ReturnsThe Historical RecordAverage ReturnsReturn VariabilityArithmetic Averages versus Geometric AveragesRisk and Return TradeoffThere are two key observationsFirst, there is a substantial reward, on average, for bearing risk.Second, greater risks accompany greater returns.12Dollar ReturnsTotal dollar returnis the return on an investment measured in dollars, accounting for all interim cash flows and capital gains or losses.Example:Loss)(orGainCapitalIncomeDividendStockaonReturnDollarTotal+=13Example: Calculating Total Dollar ReturnsSuppose 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 sharesCapital gain: 40 shares times ($35  $25) = $400 Dividends: 40 shares times $2 = $80 Total Dollar Return is $400 + $80 = $48014Percent ReturnsTotal percent returnis the return on an investment measured as a percentage of the original investment.The total percent return is the return for each dollarinvested.Example, you buy a share of stock:)InvestmentBeginning(i.e.,PriceStockBeginningStockaonReturnDollarTotalReturnPercentorPriceStockBeginningLoss)(orGainCapitalIncomeDividendStockaonReturnPercent=+=15Example: Calculating Total Percent ReturnsSuppose 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%ORTotal percent return = $480 / $1000 = 48%Annualizing Returns, I.You buy 200 shares of Lowes Companies, Inc. at $48 per share....
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 Fall '08
 phsiao

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