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chapter 10 - Chapter 10 Risk and Return Lessons from Market...

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Chapter 10: Risk and Return: Lessons from Market History Ken Seng Tan Actsc 372 Fall 2011 Actsc 372-Chap. 10 Chapter Outline Returns Holding-Period Returns Risk Statistics Return Statistics Risk Premium Summary and Conclusions Actsc 372-Chap. 10 Returns (Dollar vs Percentage) Dollar Returns = Dividend + Change in Market Value Time 0 1 Initial investment Ending market value Dividends dollar return beginning market value dividend change in market value beginning market value dividend yield Perc ca entage Re pital gai tur n y eld n s i ± ±
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Actsc 372-Chap. 10 Returns: Example Suppose you bought 100 shares of company X at the beginning of the year at $25/share. Over the past year, you received dividends $0.20/share. At the end of the year, the stock sells for $30/share. What is your return? Initial investment = $25 × 100 = $2,500. At the end of the year, you have stock worth $3,000 and cash dividends of $20. Return (in dollar) = $520 = $20 + ($3,000 $2,500). Return (in percentage) = 500 , 2 $ 520 $ % 8 . 20 Actsc 372-Chap. 10 The holding period return is the return that an investor would get when holding an investment over a period of n years, Suppose the return during year i is given as r i : 1 ) 1 ( ) 1 ( ) 1 ( return period holding 2 1 ² ± u u ± u ± n r r r " Holding Period Returns Actsc 372-Chap. 10 Holding Period Return: Example Year Return 1 10% 2 -5% 3 20% 4 15% 1 2 3 4
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