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

Slides:

Advertisements

Similar presentations

Chapter Outline 9.1 Returns 9.2 Holding-Period Returns

Advertisements

Risk and Return – Introduction Chapter 9 For 9.220,

1 1 C h a p t e r A Brief History of Risk and Return second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan.

(5) ROSENGARTEN CORPORATION Pro forma balance sheet after 25% sales increase ($)(Δ,$)($)(Δ,$) AssetsLiabilities and Owner's Equity Current assetsCurrent.

SOME LESSONS FROM CAPITAL MARKET HISTORY Chapter 12 1.

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.

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

1 1 C h a p t e r A Brief History of Risk and Return second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan.

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.

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

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.

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

1 1 C h a p t e r A Brief History of Risk and Return second edition Fundamentals of Investments Valuation & Management Charles J. Corrado Bradford D. Jordan.

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

Copyright © 2011 Pearson Prentice Hall. All rights reserved. Chapter 10 Capital Markets and the Pricing of Risk.

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

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.

Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

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.

Pro forma balance sheet after 25% sales increase

12-1 Some Lessons from Capital Market History Chapter 12 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Capital Markets 1 Risk and Return: Historical Perspective Historical Returns Market Efficiency.

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

© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Some Lessons From Capital Market History Chapter Twelve Prepared by Anne Inglis, Ryerson University.

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.

10.0 Chapter 10 Some Lessons from Capital Market History.

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

Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 1 A Brief History of Risk and Return.

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.

Lecture Topic 9: 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.

Chapter 10 Capital Markets and the Pricing of Risk.

Introduction to Risk The pricing of Risky Assets.

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

McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 10.0 Chapter 10 Some Lessons from Capital Market History.

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.

. Chapter Ten Lessons from capital market history Copyright  2011 McGraw-Hill Australia Pty Ltd PPTs to accompany Fundamentals of Corporate Finance 5e,

Chapter 12 Some Lessons from Capital Market History

Chapter 12 Lessons from Capital Market History Homework: 1, 7 & 14.

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)

McGraw-Hill/Irwin ©2001 The McGraw-Hill Companies All Rights Reserved 10.0 Chapter 10 Some Lessons from Capital Market History.

Some Lessons from Capital Market History Chapter 10.

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

(5) ROSENGARTEN CORPORATION Pro forma balance sheet after 25% sales increase ($)(Δ,$)($)(Δ,$) AssetsLiabilities and Owner's Equity Current assetsCurrent.

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.

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

Chapter 10 Some Lessons from Capital Market History 0.

Holding Period Returns

Chapter Ten Some Lessons from Capital Market History

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

Chapter 11 Risk & Return in Capital Markets.

Presentation transcript:

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

2 Introduction Economic activity has three principal participants and three principal markets ParticipantsMarkets HouseholdsLabor GovernmentsGoods & services FirmsFinancial Financial markets are the means by which financial assets are priced and traded b/n markets & participants Financial assets represent claims on real assets, they do not produce goods & services directly.

3 Function of Financial Markets Function of Financial Markets (1) Facilitate the transfer of capital from those with excess supply to those with excess demand Increase liquidity through aggregation of supply Reduce transaction costs Thereby greatly expanding the ability of the other markets to function efficiently There are more controversial functions of capital markets...

4 Function of Financial Markets Function of Financial Markets (2) Allocate funds to their most efficient use through the pricing mechanism Provide information about risk Which may only be best understood with a brief look at financial market history...

6 Average Annual Returns: InvestmentAverage Return Large cap stocks12.83% U.S. Treasury bonds 5.41% U.S. Treasury bills 4.10% Inflation 3.20% Source: © Stocks, Bonds, Bills and Inflation 1998 Yearbook™, Ibbotson Associates, Inc. Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved

7 DatePoint Loss%Loss Oct. 19, % Oct. 28, % Oct. 29, % Nov. 6, % Dec. 18, % Five Largest One-Day Percentage Declines in the Dow-Jones Industrial Average

8 Period% Decline in S&P 500 October 10, July 24, % August 25, October 19, % October 21, October 26, % November 2, December 4, % October 9, January 30, % July 16, October 11, % February 18, April 11, % The Great Bull Market of : “Bumps” Along the Way Adapted from the T. Rowe Price Report, Fall 1997 issue.

9 The S&P, 9/11 in Perspective

10 Risk Premiums & the First Lesson Rate of return on T-bills is essentially risk-free. Investing in stocks is risky. The difference between the return on T-bills and stocks is the risk premium for investing in stocks. This is the additional return we receive for bearing risk, or “There is a reward for bearing risk!”

12 Historical Returns, Standard Deviations, and Frequency Distributions: Source: © Stocks, Bonds, Bills, and Inflation 1997 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

13

14 Lessons From Market History Risk premiums –The additional compensation we receive for investing in a risky asset. The first lesson –There is a reward for bearing risk. The second lesson –The greater the potential reward, the greater the risk. Bottom-line –The only way to induce investors (those with financial assets) to take on additional risk, is to provide higher returns. Why would anyone invest in a riskier asset if the probable reward wasn’t higher? –Financial markets pool capital and allocate it via the pricing mechanism according the trade-off between risk & reward.

15 Efficient Market Hypothesis We now know what markets are supposed to do, but how well do they really function? Efficient Market. A market is efficient when the price of an asset reflects all information relevant to the asset. This means that the price of an asset must reflect the information, expectations, and risk adjustment of all investors. Efficient Market Hypothesis A market is informationally efficient if prices fully reflect all available relevant information. Efficient markets mean that the expected returns implicit in the price of the security should reflect its risk: there are no abnormal returns. No one can “beat” the market.

16 Efficient Market Hypothesis 3 Forms of Informational Efficiency Weak form Prices fully reflect historical price and trading data. Technical analysis is bologna. Semi-strong form Prices fully reflect all publicly available information. No systematic profit can be earned by analyzing earning reports, management reports, etc. It’s already in prices the second it is announced! Strong form Prices fully reflect all information, whether public or not. Hence there is no systematic profit to be made from insider information.