Chapter 12 Some Lessons from Capital Market History 0
0 Chapter 12 Some Lessons from Capital Market History
Chapter Outline ■Returns The Historical Record Average Returns:The First Lesson The Variability of Returns:The Second Lesson More on Average Returns Capital Market Efficiency
1 Chapter Outline n Returns n The Historical Record n Average Returns: The First Lesson n The Variability of Returns: The Second Lesson n More on Average Returns n Capital Market Efficiency
Key Concepts and Skills Know how to calculate the return on an investment Understand the historical returns on various types of investments Understand the historical risks on various types of investments
2 Key Concepts and Skills n Know how to calculate the return on an investment n Understand the historical returns on various types of investments n Understand the historical risks on various types of investments
Risk,Return,and Financial Markets We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets Lessons from capital market history There is a reward for bearing risk The greater the risk,the greater the potential reward oThis is called the risk-return trade-off
3 Risk, Return, and Financial Markets n We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets n Lessons from capital market history q There is a reward for bearing risk q The greater the risk, the greater the potential reward q This is called the risk-return trade-off
Dollar Returns Total dollar return income from investment capital gain (loss)due to change in price Example: You bought a bond for $950 one year ago.You have received two coupons of $30 each.You can sell the bond for $975 today.What is your total dollar return? ■Income=$30+$30=$60 Capital gain $975-$950 $25 Total dollar return $60 $25 $85
4 Dollar Returns n Total dollar return = income from investment + capital gain (loss) due to change in price n Example: q You bought a bond for $950 one year ago. You have received two coupons of $30 each. You can sell the bond for $975 today. What is your total dollar return? n Income = $30 + $30 = $60 n Capital gain = $975 – $950 = $25 n Total dollar return = $60 + $25 = $85