Chapter 1

# Chapter 1 - 1-1Summary•Our goal in this chapter is to see...

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Unformatted text preview: 1-1Summary•Our goal in this chapter is to see what financial market history can tell us about risk and return.–Dollar Returns and Percent Returns–The Historical Record•Average Returns•Return Variability–Arithmetic Averages versus Geometric Averages–Risk and Return Trade-off•There are two key observations–First, there is a substantial reward, on average, for bearing risk.–Second, greater risks accompany greater returns.1-2Dollar Returns•Total dollar returnis the return on an investment measured in dollars, accounting for all interim cash flows and capital gains or losses.•Example:Loss)(orGainCapitalIncomeDividendStockaonReturnDollarTotal+=1-3Example: Calculating Total Dollar Returns•Suppose 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 shares–Capital gain: 40 shares times (\$35 - \$25) = \$400– Dividends: 40 shares times \$2 = \$80– Total Dollar Return is \$400 + \$80 = \$4801-4Percent Returns•Total 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=+=1-5Example: Calculating Total Percent Returns•Suppose 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%OR–Total percent return = \$480 / \$1000 = 48%Annualizing Returns, I.•You buy 200 shares of Lowe’s Companies, Inc. at \$48 per share....
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Chapter 1 - 1-1Summary•Our goal in this chapter is to see...

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