Chapter_12_FI311_FA2011_SS

Chapter_12_FI311_FA2011_SS - Click to edit Master title...

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Unformatted text preview: Click to edit Master title style 12/29/11 1 12/29/11 Chapter 12 Some Lessons From Capital Market History Click to edit Master title style 12/29/11 2 12/29/11 Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand the historical risks on various types of investments Understand the implications of market efficiency Click to edit Master title style 12/29/11 3 12/29/11 Risk, Return and Financial Markets We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets Lessons from capital market history There is a reward for bearing risk The greater the potential reward, the greater the risk This is called the risk-return trade-off Click to edit Master title style 12/29/11 4 12/29/11 Click to edit Master title style 12/29/11 5 12/29/11 Dollar Returns Total dollar return = income from investment + capital gain (loss) due to change in price Example: You bought a bond for $950 one year ago. You have received two coupons of $30 each. You can sell the bond for $975 today. What is your total dollar return? Income = 30 + 30 = 60 Capital gain = 975 950 = 25 Total dollar return = 60 + 25 = $85 Click to edit Master title style 12/29/11 6 12/29/11 Percentage Returns It is generally more intuitive to think in terms of percentage, rather than dollar, returns: Dividend yield = income / beginning price Capital gains yield = (ending price beginning price) / beginning price Total percentage return = dividend yield + capital gains yield Click to edit Master title style 12/29/11 7 12/29/11 Example Calculating Returns You bought a stock for $35, and you received dividends of $1.25. The stock is now selling for $40. What is your dollar return? Dollar return = 1.25 + (40 35) = $6.25 What is your percentage return? Dividend yield = 1.25 / 35 = 3.57% Capital gains yield = (40 35) / 35 = 14.29% Total percentage return = 3.57 + 14.29 = 17.86% Click to edit Master title style 12/29/11 8 12/29/11 The Importance of Financial Markets Financial markets allow companies, governments and individuals to increase their utility Savers have the ability to invest in financial assets so that they can defer consumption and earn a return to compensate them for doing so Borrowers have better access to the capital that is available so that they can invest in productive assets Financial markets also provide us with information about the returns that are required for various levels of risk Click to edit Master title style 12/29/11 9 12/29/11 Stocks, Bond, Bills and Inflation Click to edit Master title style 12/29/11 10 12/29/11 Stocks Click to edit Master title style 12/29/11 11 12/29/11 Bonds Click to edit Master title style...
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Chapter_12_FI311_FA2011_SS - Click to edit Master title...

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