This lecture introduces you to some lessons from capital market history. After completing this unit, you should be able to: 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. | 10- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 10- Key Concepts and Skills Understand: How to calculate the return on an investment The historical returns on various types of investments The historical risks on various types of investments The implications of market efficiency 10- 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 10- Risk–Return Tradeoff Two key lessons from capital market history: There is a reward for bearing risk The greater the potential reward, the greater the risk 10- Dollar & Percent Returns Total dollar return = the return on an investment measured in dollars $ Return = Dividends + Capital Gains Capital Gains = Price received – Price paid Total percent return = the return on an investment measured as a percentage of the original | 10- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 10- Key Concepts and Skills Understand: How to calculate the return on an investment The historical returns on various types of investments The historical risks on various types of investments The implications of market efficiency 10- 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 10- Risk–Return Tradeoff Two key lessons from capital market history: There is a reward for bearing risk The greater the potential reward, the greater the risk 10- Dollar & Percent Returns Total dollar return = the return on an investment measured in dollars $ Return = Dividends + Capital Gains Capital Gains = Price received – Price paid Total percent return = the return on an investment measured as a percentage of the original investment. % Return = $ Return/$ Invested 10- Percent Return Dividend Yield Capital Gains Yield 10- Example: Calculating Total Dollar and Total Percent Returns You invest in a stock with a share price of $25. After one year, the stock price per share is $35 Each share paid a $2 dividend What was your total return? Dollars Percent Dividend $ $2/25 = 8% Capital Gain $35 - $25 = $10 $10/25= 40 % Total Return $2 + $10 = $12 $12/$25 = 48% 10- Figure . Financial Markets The Historical Record: 1925-2008 10- Year-to-Year Total Returns Large-Company Stock Returns 10- Year-to-Year Total Returns Long-Term Government Bond Returns 10- Year-to-Year Total Returns . Treasury Bill Returns 10- Average Returns: The First Lesson 1926 - 2008 Investment Average Return Large Stocks Small Stocks Long-term Corporate Bonds Long-term Government Bonds . Treasury Bills Inflation Table 10- .
