Fundamental Of Investment Chapter One. A Brief History of Risk and Return “ If you want to make money, go where the money is “ “ If you want to make money,

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Presentation transcript:

Fundamental Of Investment Chapter One

A Brief History of Risk and Return “ If you want to make money, go where the money is “ “ If you want to make money, go where the money is “ Joseph Kennedy Joseph Kennedy

1.1 Returns Dollar Returns: Dollar Returns: If you buy an asset of any type, your gain or ( loss) from that investment is called the return on your investment. This return will have two components: If you buy an asset of any type, your gain or ( loss) from that investment is called the return on your investment. This return will have two components: 1. You may receive some cash directly while you own the investment 2. The value of the asset you purchase may change. You may have a capital gain or loss

Example Suppose you purchased 100 shares of stocks in Harley-Davidson on January 1. At that time, Harley was selling for about $37/share so the shares cost you $3700, at the end of the year, you want to see how you did with your investment?? Suppose you purchased 100 shares of stocks in Harley-Davidson on January 1. At that time, Harley was selling for about $37/share so the shares cost you $3700, at the end of the year, you want to see how you did with your investment?? Moreover, Harley pays dividend of $1.85/ share !!

The total dollar return The return on an investment measured in dollars that accounts for all cash flows and capital gains or losses. The return on an investment measured in dollars that accounts for all cash flows and capital gains or losses. Total dollar return= Dividend income + Capital Gain ( Loss) Total dollar return= Dividend income + Capital Gain ( Loss)

Percentage returns It ’ s usually more convenient to summarize information about return in percentage terms than in dollar terms, because that way you return doesn ’ t depend on how much you actually invested. With percentage returns the question we want to answer is how much do we get from each dollar invested? It ’ s usually more convenient to summarize information about return in percentage terms than in dollar terms, because that way you return doesn ’ t depend on how much you actually invested. With percentage returns the question we want to answer is how much do we get from each dollar invested?

Percentage Returns Dividend Yield: the annual stock dividend as a percentage of the initial stock price Dividend Yield: the annual stock dividend as a percentage of the initial stock price Dividend Yield = D t+1 / P t Dividend Yield = D t+1 / P t Capital Gains Yield: The change in stock price as a percentage of the initial stock price. Capital Gains Yield: The change in stock price as a percentage of the initial stock price. Capital Gains Yield= ( P t+1 – P t )/P t Capital Gains Yield= ( P t+1 – P t )/P t

Percentage Returns Total percent Return: The return on an investment measured as a percentage that accounts for all cash flows and capital gains or losses. Total percent Return: The return on an investment measured as a percentage that accounts for all cash flows and capital gains or losses. Percentage Return= Dividend Yield + Capital Gains Yield. Percentage Return= Dividend Yield + Capital Gains Yield.

1.2 The Historical Record Asset category : Asset category : 1. Large company stocks: the large company stock portfolio is based on S&P(500) Index, which contains 500 of the largest companies ( in terms of total market value of outstanding stock ) In the USA. 2. Small company stocks: this is a portfolio composed of stock of smaller companies in the NYSE.

1.2 The Historical Record 3. Long term corporate Bonds. This is a portfolio of high quality bonds with 20 years to maturity. 4. Long term government bonds. This is a portfolio of government bonds with 20 years to maturity. 5. Treasury Bills. This is a portfolio of treasury bills ( T-bills ) for short with a three month maturity

Note Small company investment did the best over all. Small company investment did the best over all. Investment in stocks is the best whether for big or small companies but for a long period of time. Investment in stocks is the best whether for big or small companies but for a long period of time.

Risk and by the McGraw- Hill Companies Inc.All rights reserved. McGraw Hill / Irwin