Capital Market Theory Return & Risk Calculations, Risk Premiums, and Historical Averages.

Slides:

Advertisements

Similar presentations

Chapter Outline 9.1 Returns 9.2 Holding-Period Returns

Advertisements

The Trade-off between Risk and Return

Risk and Return – Introduction Chapter 9 For 9.220,

Risk and Return: Lessons from Market History Chapter 10 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapters 9 & 10 – MBA504 Risk and Returns Return Basics –Holding-Period Returns –Return Statistics Risk Statistics Return and Risk for Individual Securities.

Chapter 6 The Returns and Risks from Investing. Function of both return and risk – At the centre of security analysis How should realized return and risk.

Risk, Return, and Discount Rates Capital Market History The Risk/Return Relation Applications to Corporate Finance.

© 2009 Morningstar, Inc. All rights reserved. 3/1/2009 Long-Term Investment Performance.

Risk, Return, and Discount Rates

12-0 Chapter 12: Outline Returns The Historical Record Average Returns: The First Lesson The Variability of Returns: The Second Lesson More on Average.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Some Lessons From Capital Market History Chapter Twelve.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Some Lessons From Capital Market History Chapter Twelve.

Fundamental Of Investment

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 12 Some Lessons from Capital Market History.

Chapter 6 The Returns and Risks from Investing. Explain the relationship between return and risk. Sources of risk. Methods of measuring returns. Methods.

Chapter 9 Outline 9.1Returns 9.2Holding-Period Returns 9.3Return Statistics 9.4Average Stock Returns and Risk-Free Returns 9.5Risk Statistics 9.6Summary.

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Some Lessons From Capital Market History Chapter Twelve.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Some Lessons from Capital Market History Chapter 10.

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 10 Some Lessons from Capital Market History.

Risk, Return, and Discount Rates Capital Market History The Risk/Return Relation Application to Corporate Finance.

Risk, Return, and Discount Rates Capital Market History The Risk/Return Relation Applications to Corporate Finance.

Finance 300 Financial Markets Lecture 1 Professor J. Petry, Fall, 2002©

Jacoby, Stangeland and Wajeeh, uDollar Return = Dollar Dividend + Change in Market Value uPercentage Return = Dollar Return / Beginning Market Value.

1 Chapter 09 Characterizing Risk and Return McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Risk and Return – Introduction For 9.220, Term 1, 2002/03 02_Lecture12.ppt Student Version.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Risk and Return: Lessons from Market History Module 5.1.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies,

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 0 Chapter 10 Some Lessons from Capital Market History.

Chapter 10 - Capital Markets!. Key Concepts and Skills Know how to calculate the return on an investment!!! Understand the historical returns on various.

The Returns and Risks From Investing

1-1 1 A Brief History of Risk and Return. 1-2 A Brief History of Risk and Return Two key observations: 1. There is a substantial reward, on average, for.

10-1 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Last Week.. Capital Budgeting Techniques Non-Conventional Cash Flows

12-0 Some Lessons from Capital Market History Chapter 12 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Capital Market Efficiency. Risk, Return and Financial Markets Lessons from capital market history –There is a reward for bearing risk –The greater the.

© 2009 Cengage Learning/South-Western The Trade-off Between Risk and Return Chapter 6.

Chapter 12 Some Lessons from Capital Market History McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 10 Some Lessons from Capital Market History.

Chapter 10: Risk and return: lessons from market history

Ch 12. Capital Market History. 1) Return Measures In this chapter, we want to understand the relationship between returns and risks. 1) How to measure.

Learning About Return and Risk from the Historical Record

Lecture Topic 9: Risk and Return

A History of Risk and Return

Risk and Return: Lessons from Market History Chapter 10 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

T12.1 Chapter Outline Chapter 12 Some Lessons from Capital Market History Chapter Organization 12.1Returns 12.2The Historical Record 12.3Average Returns:

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved CHAPTER 9 Risk and Return Lessons from Market History.

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

Risk and Return 1Finance - Pedro Barroso. Returns Dollar Returns the sum of the cash received and the change in value of the asset, in dollars Time01.

Introduction to Risk The pricing of Risky Assets.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 5-1 Chapter 5 History of Interest Rates and Risk Premiums.

McGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Risk and Return Lessons from Market History Chapter 10.

Chapter McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. A Brief History of Risk and Return 1.

9-0 McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited Corporate Finance Ross  Westerfield  Jaffe Sixth Edition 9 Chapter Nine Capital Market Theory:

Corporate Finance Ronald F. Singer FINA 4330 Risk and Return Lecture 11 Fall 2010.

10-0 McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited Chapter Outline 10.1Returns 10.2Holding-Period Returns 10.3Return Statistics 10.4Average Stock.

We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets (e.g., capital investments by firms)

Capital Market Theory (Chap 9,10 of RWJ) 2003,10,16.

0 Risk and Return: Lessons from Market History Chapter 10.

McGraw-Hill/Irwin Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved. 9-0 CHAPTER 9 Capital Market Theory: An Overview.

G. M. Wali Ullah Lecturer, School of Business Independent University, Bangladesh (IUB) Chapter 10 Risk and Return FIN 302 (3) Copyright.

Investments Lecture 4 Risk and Return. Introduction to investments §Investing l Definition of an investment: The current commitment of dollars for a period.

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,

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 5 Introduction to.

0 Chapter 12 Some Lessons from Capital Market History Chapter Outline Returns The Historical Record Average Returns: The First Lesson The Variability of.

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

Holding Period Returns

Some Lessons from Capital Market History

Ibbotson® SBBI® Stocks, Bonds, Bills, and Inflation

Learning About Return and Risk from the Historical Record

Presentation transcript:

Capital Market Theory Return & Risk Calculations, Risk Premiums, and Historical Averages

Chhachhi/519/Ch. 92 Returns Dollar Returns have 2 components: Income Component: Direct cash payments (e.g., dividends or interest) Price Change: Capital gain or loss Whether realized or unrealized, capital gain/loss is always part of the total return Percentage Return: Dividend yield % + Capital gains yield % R t = D t+1 /P t + (P t+1 - P t )/P t

Chhachhi/519/Ch. 93 Average and Holding Period Returns Average or Mean returns:  R t /T Arithmetic mean; Intuitive Average annual return for :13.53% Holding period returns: [(1+R 1 ) * (1+R 2 ) * (1+R 3 ) *…. * (1+R T )] - 1 HPR = = % $100,000 invested on 1/1/91 would have grown to $432,175 on 12/31/03

Chhachhi/519/Ch. 94 Geometric Mean Returns Geometric Mean returns (superior): [(1+R 1 ) *(1+R 2 ) *(1+R 3 ) *…. * (1+R T )] (1/T) - 1 G.M = ( ) 1/13 -1=11.92% HPR = = % $100,000 invested on 1/1/91 would have grown to $548,006 on 12/31/99 G.M = ( ) 1/9 -1=20.81%

Chhachhi/519/Ch. 95 Risk Variance =  2 =   R t - R) 2 /(T-1) Variance = S.D = Normal distribution

Chhachhi/519/Ch. 96 Average Returns and Risk Premiums (Historical) Risk Premium = excess return = return on an asset - risk-free return Real Return = Nominal Return (GM) - Inflation 99 years of investing in T-Bills to double one’s REAL wealth Only 9.6 years stock investment

Chhachhi/519/Ch. 97 The Future Value of an Investment of $1 in 1925 $59.70 $17.48 Source: © Stocks, Bonds, Bills, and Inflation 2003 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. $1,775.34

Chhachhi/519/Ch. 98 The Future Value of an Investment of $1 in 1926 $40.22 $15.64 Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.

Chhachhi/519/Ch. 99 Historical Returns, Source: © Stocks, Bonds, Bills, and Inflation 2003 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. – 90%+ 90%0% Average Standard Series Annual Return DeviationDistribution Large Company Stocks12.2%20.5% Small Company Stocks Long-Term Corporate Bonds Long-Term Government Bonds U.S. Treasury Bills Inflation3.14.4

Chhachhi/519/Ch. 910 Historical Returns, Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. – 90%+ 90%0% Average Standard Series Annual Return DeviationDistribution Large Company Stocks13.0%20.3% Small Company Stocks Long-Term Corporate Bonds Long-Term Government Bonds U.S. Treasury Bills Inflation3.24.5

Chhachhi/519/Ch. 911 The Risk-Return Tradeoff

Chhachhi/519/Ch. 912 Rates of Return Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.

Chhachhi/519/Ch. 913 Stock Market Volatility Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. The volatility of stocks is not constant from year to year.

Chhachhi/519/Ch. 914 Small-Cap Effect? $ excluding Large$1,370$368 Small$3,990$263 Is the whole “small-cap” effect a result of a “freakish” 9-year period? What about risk of small-caps?? Can you eliminate that by diversification? H.W. 2, 4, 6-9, 12, 14, 16, 19