Risk & Return Updated

Risk & Return Updated - Introduction To Risk Return...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Introduction To Risk & Return Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 9 2010 E. Zivot 2005 R.W. Parks/L.F. Davis 2004 August 9, 2010 A First Look at Risk and Return Standard & Poor’s 500: 90 U S stocks up to 1957 Standard & Poor s 500: 90 U.S. stocks up to 1957 and 500 after that. Leaders in their industries and among the largest firms traded on U.S. Markets. Small stocks: Securities traded on the NYSE with market capitalizations in the bottom 10%. World Portfolio: International stocks from all the World Portfolio: International stocks from all the world’s major stock markets in North America, Europe, and Asia.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 A First Look at Risk and Return (cont’d) Corporate Bonds: Long term AAA rated U S Corporate Bonds: Long-term, AAA-rated U.S. corporate bonds with maturities of approximately 20 years. Treasury Bills: An investment in three-month Treasury bills. Figure 10.1 Value of $100 Invested at the End of 1925 Source: Chicago Center for Research in Security Prices (CRSP) for U.S. stocks and CPI, Global Finance Data for the World Index, Treasury bills and corporate bonds.
Background image of page 2
3 A First Look at Risk and Return (cont’d) Small stocks had the highest long term returns Small stocks had the highest long-term returns, while T-Bills had the lowest long-term returns. Small stocks had the largest fluctuations in price, while T-Bills had the lowest. »H igher risk requires a higher return. Historical Returns of Stocks and Bonds Computing Historical Return Computing Historical Returns » Realized Return – The return that actually occurs over a particular time period. 1 1 1 1 1 Dividend Yield Capital Gain Rate ++ + + + +− =− = + =+ tt t t t Div P Div Div P R PP P
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 Historical Returns of Stocks and Bonds (cont'd) Computing Historical Return Computing Historical Returns » If you hold the stock beyond the date of the first dividend, then to compute your return you must specify how you invest any dividends you receive in the interim. Let’s assume that all dividends are immediately reinvested and used to purchase additional shares of the same stock or security . Historical Returns of Stocks and Bonds (cont'd) Computing Historical Return Computing Historical Returns » If a stock pays dividends at the end of each quarter, with realized returns R Q1 , . . . , R Q4 each quarter, then its annual realized return, R annual , is computed as: annual 1 2 3 4 1 (1 )(1 )(1 )(1 ) += + + + + QQ QQ R RRRR
Background image of page 4
5 Example: Computing Historical Returns Problem Problem: » What were the realized annual returns for Ford stock in 1999 and in 2008? Example: Computing Historical Returns Solution » First, we look up stock price data for Ford at the start and end of the year, as well as dividend dates. From these data, we construct the following table: Date Price ($) Dividend ($) Return Date Price ($) Dividend ($) Return 12/31/1998 58.69 12/31/2007 6.73 0 1/31/1999 61.44 0.26 5.13% 3/31/2008 5.72 0 15.01% 4/30/1999 63.94 0.26 4.49% 6/30/2008 4.81 0 15.91% 7/31/1999 48.5 0.26 23.74% 9/30/2008 5.2 0 8.11% 10/31/1999 54.88 0.29 13.75% 12/21/2008 2.29 0 55.96% 12/31/1999 53.31 2.86%
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 Alternative Example 10.2 (cont’d) Solution Wt h i d t Fl t h t » We compute each period’s return.
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 26

Risk & Return Updated - Introduction To Risk Return...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online