Percentage Returns It is generally more intuitive to think in terms of percentages than dollar returns Dividend yield income beginning price Capital gains yield =(ending price- beginning price)/beginning price Total percentage return dividend yield capital gains yield 5
5 Percentage Returns n It is generally more intuitive to think in terms of percentages than dollar returns n Dividend yield = income / beginning price n Capital gains yield = (ending price – beginning price) / beginning price n Total percentage return = dividend yield + capital gains yield
Example:Calculating Returns You bought a stock for $35 and you received dividends of $1.25.The stock is now selling for $40. What is your dollar return? Dollar return 1.25+(40-35)=$6.25 What is your percentage return? Dividend yield 1.25/35 3.57% Capital gains yield =(40-35)/35 14.29% Total percentage return 3.57+14.29 17.86% 6
6 Example: Calculating Returns n You bought a stock for $35 and you received dividends of $1.25. The stock is now selling for $40. q What is your dollar return? n Dollar return = 1.25 + (40 – 35) = $6.25 q What is your percentage return? n Dividend yield = 1.25 / 35 = 3.57% n Capital gains yield = (40 – 35) / 35 = 14.29% n Total percentage return = 3.57 + 14.29 = 17.86%
The Importance of Financial Markets Financial markets allow companies,governments,and individuals to increase their utility Savers have the ability to invest in financial assets so they can defer consumption and earn a return to compensate them for doing so Borrowers have better access to the capital that is available,allowing them to invest in productive assets Financial markets also provide us with information about the returns that are required for various levels of risk
7 The Importance of Financial Markets n Financial markets allow companies, governments, and individuals to increase their utility q Savers have the ability to invest in financial assets so they can defer consumption and earn a return to compensate them for doing so q Borrowers have better access to the capital that is available, allowing them to invest in productive assets n Financial markets also provide us with information about the returns that are required for various levels of risk
FIGURE 10.4 A $1 investment in different types of portfolios:1925-2006(Year-end 1925 S1) $20,000 S15,922.43 $10.000 S3.077.33 Small-company stocks s1,000 Large-company stocks $100 $71.69 Long-term $19.29 government bonds $11.26 $10 Inflation Treasury bills $0LLLLLLLLLLLLLLLLLLLLLLL山 1925 1935 1945 1955 1965 1975 1985 1995 2006 Year-end 8 Slide 10.8 Source:Stocks,Bonds,Bills,and Inflation YearbookTM,lbbotson Associates,Inc.,Chicago (annually updates work by Roger G.Ibbotson and Rex Sinquefield).All rights reserved
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Year-to-Year Total Returns Large-Company Stock Returns Large Companies Long-Term Government Bond Returns Long-Term Government Bonds U.S.Treasury Bill Returns U.S.Treasury Bills 9
9 Year-to-Year Total Returns Large-Company Stock Returns Long-Term Government Bond Returns U.S. Treasury Bill Returns