1. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -1  An Example: A Canadian Pacific Railway (CP) share had a value of $61.40 at the beginning of 2007. By the end of the year, the price went up to $64.22. In addition, during the year, CP paid a $0.90 dividend per share. % return = (64.22 – 61.40) + 0.90= 6.06% 61.40 Dividend yield = 0.90/61.40 = 1.47% Capital gain yield = 2.82/61.40 = 4.59% 1.47% + 4.59% = 6.06% LO1

2. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -2  Market index: A m easure of the investment performance of the overall market  Canadian Market Indexes ◦ S&P/TSX Composite Index  Index of the investment performance of a portfolio of the major stocks listed on the Toronto Stock Exchange ◦ S&P/TSX Composite Total Return Index (TSXT)  Measure of the Composite Index based on the prices plus dividends paid by the stocks in the S&P/TSX Index LO1

3. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -3  U.S. Market Indexes ◦ Dow Jones Industrial Average  Value of a portfolio holding one share in each of 30 large industrial (blue chip) firms ◦ Standard & Poor’s Composite Index (S&P 500)  U.S. Index of the investment performance of a portfolio of 500 large stocks LO1

4. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -4 The Historical Record: If a $1 investment was made in 1925, what would it grow to by the end of 2010, under different types of investments? LO1

5. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -5 Average returns of T-bills, Government bonds and common stocks (1926 – 2010): Average AnnualAverage PortfolioRate of ReturnRisk Premium Treasury Bills4.6% - Long term Gov’t bonds6.5%1.9% Common stocks11.5%6.9% LO1

6. © 2012 McGraw-Hill Ryerson LimitedChapter 11 -6  The historical record shows that investors have received a risk premium for holding risky assets  In general, we can say: Rate of return on = Rate of return on + Market risk any securityT-bills premium.  Market risk premium has been in the neighbourhood of 6.9%. Thus, in 2011, we can expect a market return of: 1% + 6.9% = 7.9%  The same for 1981 was 27% LO1