LECTURE9

# LECTURE9 - Lecture 9 Lecture Capital Market Theory An...

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Lecture 9 Lecture 9 Capital Market Theory : An Overview Capital Market Theory : An Overview

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Returns on Stock For percentage returns R 1 , R 2 , …, R T , the average percentage return is defined by R = = + + + = T 1 t t T 2 1 R T 1 T ) R R (R R Let be the dividend paid at the end of current period, and P t the price of the stock at time t. Then the percentage return is given by ( dividend yield ) plus ( capital gain/loss ). P P - P P D 1 R t t 1 t t t t + + = + 1 t D + Two components to the return on most stocks are dividend and capital gain/loss (reinvested if not realized).
Returns on Stock (continued) The sample variance of these returns measures the variations in percentage returns 2 s = = T 1 t 2 t 2 ) R - (R 1 - T 1 s This formula has (T-1) as a divisor, not T, to ensure that s 2 is an unbiased estimator of the underlying population variance . The sample standard deviation is s has the same unit of measurement as s s 2 = s ' t R and R Empirical observations based on these statistics :

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LECTURE9 - Lecture 9 Lecture Capital Market Theory An...

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