Chapter 1

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Author:
Anonymous
ID:
141325
Filename:
Chapter 1
Updated:
2012-03-13 10:11:45
Tags:
leclair
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Description:
equity
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  1. 1. Components of Return
    • •Current income:
    • –dividends
    • (stocks)
    • –interest
    • (bonds)
    • –rent (real
    • estate)
    • •Capital Gain (Loss):
    • –change in
    • market value
  2. 1. Total Return
    • o The sum of the current income and the capital
    • gain
    • 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
  3. 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
  4. percent return
    • • is the return on an
    • investment measured as a percentage of the

    • ·
    • original investment.The
    • total percent return is the return for each

    • ·
    • dollar invested.

    • ·
    • = Divident Yield +
    • Capital Gains Yield
    • or TDR/ Beginning Stock
    • Price
  5. 1. Dividend Yield
    Dividend/Share Price
  6. 1. Capital Gain
    End price- Beg Price /beg price
  7. Annualizing Return
    • 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
    • 24.16%.
  8. Risk Premium
    The extra return on a risky asset over the risk-free rate; i.e., the reward forbearing risk.
  9. Risk-Free Rate
    The rate of return on a riskless investment
  10. 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
  11. 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
  12. 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.

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