Chapter 1

• •Current income:
• –dividends
• (stocks)
• –interest
• (bonds)
• –rent (real
• estate)
• •Capital Gain (Loss):
• –change in
• market value

• 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

•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

• • 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

Dividend/Share Price

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
• 24.16%.

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

• 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

• 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.