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Chap01

by JMI on Nov 26, 2009

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Chap01Presentation Transcript

• Fundamentals of Investments 1 C h a p t e r A Brief History of Risk and Return second edition Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu @2002 by the McGraw- Hill Companies Inc.All rights reserved.
• Who Wants To Be A Millionaire?
• A Brief History of Risk and Return
• Our goal in this chapter is to see what financial market history can tell us about risk and return.
• Two key observations emerge.
• There is a reward for bearing risk, and at least on average, that reward has been substantial.
• Greater rewards are accompanied by greater risks.
Goal
• Returns
• Example
• Total dollar return = Dividend + Capital gain
• on stock income (or loss)
Total dollar return The return on an investment measured in dollars that accounts for all cash flows and capital gains or losses.
• Returns
• Example
• Percent return = Dividend + Capital gains
• on stock yield yield
• or Total dollar return .
• Beginning stock price
Total percent return The return on an investment measured as a % of the originally invested sum that accounts for all cash flows and capital gains or losses. It is the return for each dollar invested.
• Returns
• Example: Calculating Returns
• Suppose you invested \$1,000 in a stock at \$25 per share. After one year, the price increases to \$35. For each share, you also received \$2 in dividends.
• Dividend yield = \$2 / \$25 = 8%
• Capital gains yield = (\$35 – \$25) / \$25 = 40%
• Total percentage return = 8% + 40% = 48%
• Total dollar return = 48% of \$1,000 = \$480
• At the end of the year, the value of your \$1,000 investment is \$1,480.
• Work the Web
• http://www. investorama .com
• http://finance.yahoo.com
• http ://www. nyse .com
• http://www.sec. gov
• The Historical Record: A First Look 1 - McGraw Hill / Irwin
• The Historical Record: A Longer Range Look 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• The Historical Record: A Closer Look Figure 1.3 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• The Historical Record: A Closer Look 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• The Historical Record: A Closer Look 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• The Historical Record: A Closer Look 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• The Historical Record: A Closer Look 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Work the Web
• http://www. globalfindata .com
• Average Returns: The First Lesson
• Average annual =  yearly returns
• return number of years
• Average Returns: The First Lesson 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Average Returns: The First Lesson Risk-free rate The rate of return on a riskless investment. Risk premium The extra return on a risky asset over the risk-free rate; the reward for bearing risk.
• Average Returns: The First Lesson 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Average Returns: The First Lesson
• The First Lesson
• There is a reward, on average, for bearing risk.
• Return Variability: The Second Lesson 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Return Variability: The Second Lesson Variance A common measure of volatility. Standard deviation The square root of the variance. Normal distribution A symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation.
• Return Variability: The Second Lesson
• Variance of return
Standard deviation of return where N is the number of returns
• Return Variability: The Second Lesson 1 -
• Return Variability: The Second Lesson 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Work the Web
• For an easy-to-read review of basic statistics, see:
• http://www. robertniles .com/ stats /
• Return Variability: The Second Lesson
• The Second Lesson
• The greater the potential reward, the greater the risk.
• Return Variability: The Second Lesson @2002 by the McGraw- Hill Companies Inc.All rights reserved. Source: Dow Jones Top 12 One-Day Percentage Changes in the Dow Jones Industrial Average October 19, 1987 - 22.6 % March 14, 1907 - 8.3 % October 28, 1929 - 12.8 October 26, 1987 - 8.0 October 29, 1929 - 11.7 July 21, 1933 - 7.8 November 6, 1929 - 9.9 October 18, 1937 - 7.7 December 18, 1899 - 8.7 February 1, 1917 - 7.2 August 12, 1932 - 8.4 October 27, 1997 - 7.2
• Risk and Return 1 - @2002 by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin
• Risk and Return
• The risk-free rate represents compensation for just waiting. So, it is often called the time value of money .
• If we are willing to bear risk, then we can expect to earn a risk premium, at least on average.
• Further, the more risk we are willing to bear, the greater is that risk premium.
• We will learn how to value different assets and make informed, intelligent decisions about the associated risks.
• We will also discuss different trading mechanisms and the way different markets function.
This text focuses exclusively on financial assets: stocks, bonds, options, and futures.
• Chapter Review
• Returns
• Dollar Returns
• Percentage Returns
• The Historical Record
• A First Look
• A Longer Range Look
• A Closer Look
• Chapter Review
• Average Returns: The First Lesson
• Calculating Average Returns
• Average Returns: The Historical Record