# Chapter 1

 The flashcards below were created by user Anonymous on FreezingBlue Flashcards. 1. Components of Return •Current income:–dividends(stocks)–interest(bonds)–rent (realestate)•Capital Gain (Loss):–change inmarket value 1. Total Return o The sum of the current income and the capitalgaino (or loss) earned on an investment over aspecified period of time.” Dividend income + cap gain or losso •Total dollar return is the return on aninvestment measured in dollars, accountingfor all interim cash flowsand capital gains or losses Total Return % •TR(%) = (I + (EV – BV)) ÷ BV •I ÷ BV = ??? •I ÷ BV = Dividend Yield •(EV – BV) ÷ BV = ??? •(EV – BV) ÷ BV = Capital Gain Yield •Total Return = Dividend Yield+Capital Gain yield percent return • is the return on aninvestment measured as a percentage of the · original investment.Thetotal percent return is the return for each · dollar invested. · = Divident Yield +Capital Gains Yield or TDR/ Beginning StockPrice 1. Dividend Yield Dividend/Share Price 1. Capital Gain End price- Beg Price /beg price Annualizing Return 1 + EAR = (1 + holding period percentage return)mm = the number of holding periods in a year. • In this example, m = 4 (12 months / 3 months). Therefore:1 + EAR = (1 + .0556)4 = 1.2416.So, EAR = .2416 or24.16%. Risk Premium The extra return on a risky asset over the risk-free rate; i.e., the reward forbearing risk. Risk-Free Rate The rate of return on a riskless investment 1. arithmetic average o The arithmetic average tells you what youo earned in a typical year •For the purpose of forecasting future returns –The arithmetic average isprobably "too high" for long forecasts geometric average average compound return earnedper year over a multiyear period–The geometric average isprobably "too low" for short forecasts. geometric average return= sqrt(1+R1)*(1+R2)*...(1+Rn))^(1/n) - 1 1. Risk and Return o •The risk-free rate represents compensation forjust waiting•Therefore, this is often called the time valueof money.o •First Lesson: If we are willing to bear risk, then we can expect to earn arisk premium, at least on average.o •Second Lesson: Further, the more risk we are willing to bear, the greatero the expected risk premium. AuthorAnonymous ID141325 Card SetChapter 1 Descriptionequity Updated2012-03-13T14:11:45Z Show Answers