# Chapter 1

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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%.
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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 Author: Anonymous ID: 141325 Filename: Chapter 1 Updated: 2012-03-13 14:11:45 Tags: leclair Folders: Description: equity Show Answers:

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