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1. Components of Return
- •Current income:
- –rent (real
- •Capital Gain (Loss):
- –change in
- market value
1. Total Return
- o The sum of the current income and the capital
- o (or loss) earned on an investment over a
- specified period of time.” Dividend income + cap gain or loss
- o •Total dollar return is the return on an
- investment measured in dollars, accounting
- for all interim cash flows
- and 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
- •Total Return = Dividend Yield
- +Capital Gain yield
- • is the return on an
- investment measured as a percentage of the
- original investment.The
- total percent return is the return for each
- = Divident Yield +
- Capital Gains Yield
- or TDR/ Beginning Stock
1. Dividend Yield
1. Capital Gain
End price- Beg Price /beg price
- 1 + EAR = (1 + holding period percentage return)m
- m = 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 or
The extra return on a risky asset over the risk-free rate; i.e., the reward forbearing risk.
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
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.