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
Yield
•Total Return = Dividend Yield
+Capital Gain yield
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
1. Dividend Yield
Dividend/Share Price
1. Capital Gain
End price- Beg Price /beg price
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%.
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.