The document discusses risk and return in investments. It provides an example of how to calculate percentage return on a stock investment using capital gains from price appreciation and dividends. It also includes a table showing average annual rates of return and risk premiums for different types of investments like Treasury bills, bonds, and stocks over different time periods, with common stocks providing the highest returns and risk premiums. It defines maturity premium and market risk premium and explains how the rate of return on common stocks is calculated using Treasury bill interest rates and market risk premium. Finally, it lists some common ways to measure investment risk like standard deviation and variance.

1. Risk and Return

2. Rates of Return
Return comes in two forms: (1) a dividend or interest
payment, and (2) a capital gain or capital loss.
For eg. You buy the stock of ABB at the beginning of 2003
when its price was about Rs. 250. By the end of the
year the price appreciated to Rs 500 a share. In
addition ABB paid a dividend of Rs 2.20 per share
The percentage return on your investment was therefore:
Percentage Return = (capital gain + dividend)/ initial
share price
= (250+2.2) / 250
= 100.88 %

3. 1
14.94
44.18
2350.89
100
1000
Treasury bills
Long term treasury bonds
Common stocks (S & P 500)
1925 1999

4. Portfolio Average Annual Rate of
Return
Average Risk Premium
(Extra return versus
Treasury Bills)
Treasury Bills 3.8
Treasury bonds 5.7 1.9
Common stocks 13.2 9.4
Maturity premium: The difference between Long term government bonds and
treasury bills
Market risk premium: Difference between rate of return on common stock and
interest rate on treasury bills
Rate of return on = interest rate on + market
common stocks Treasury bills risk premium

5. Measuring risk
• Normal distribution
• Standard deviation
• Variance