Topic 8 Risk and Return

# Topic 8 Risk and Return - Topic 8 Risk and Return in...

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Topic 8 Risk and Return in Capital Market

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Prescribe book Berk,J. ,Demarzo,P. and Harford,J.,2009, Fundamentals of Corporate Finance , Pearson Education, Chapter 10.
Historical Return Realized returns for individual investment and a portfolio is the total return that occurs over a particular time period. Example: Suppose that you invested \$10 in a stock a month ago. Today, it paid a dividend of \$0.50, and then you sold it for \$11. Your return came from 2 resource: dividend and the price change. % 15 % 10 % 5 10 \$ ) 10 \$ 11 (\$ 10 \$ 50 . 0 \$ Re = + = - + = turn

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Annual Realized Return If the stock is hold beyond the date of the first dividend, then we assume that all dividends are immediately reinvested and used to purchase additional shares of the same stock or security. Annual realized return: Example: Suppose you purchase Microsoft stock (MSFT) on Nov 1,2004 and held it for 1 year, selling on Oct 31, 2005. What was your return? Below is the MSFT stock price data: ) 1 )...( 1 )( 1 ( 1 2 1 n annual R R R R + + + = +
Annual Realized Return Date Price Dividend Nov 01 04 28.08 Nov 15 04 27.39 3.08 Feb 15 05 25.93 0.08 May 16 05 25.49 0.08 Aug 15 05 27.13 0.08 Oct 31 05 25.70

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Annual Realized Return Date Price Dividend Return Nov 01 04 28.08 Nov 15 04 27.39 3.08 8.51% Feb 15 05 25.93 0.08 -5.04% May 16 05 25.49 0.08 -1.39% Aug 15 05 27.13 0.08 6.75% Oct 31 05 25.70 -5.27% % 75 . 2 %) 27 . 5 1 %)( 75 . 6 1 %)( 39 . 1 1 %)( 04 . 5 1 %)( 51 . 8 1 ( = - + - - + = - - return realized Annual
Average Annual Returns The average annual return of an investment during some historical period is the average of the realized returns for each year.

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Topic 8 Risk and Return - Topic 8 Risk and Return in...

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