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. | Some lessons from capital market history Chapter 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 of various types of investments the implications of market efficiency 10- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh 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- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh 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 potential reward, the greater the risk. This is called the risk–return trade-off. 10- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Dollar returns Total dollar return = the return on an investment measured in dollars. $ return = Dividends + Capital gains Capital gains = Price received – Price paid 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 10- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Be sure to emphasise that you do not actually have to sell the stock to earn the dollar return. The point is that you | Some lessons from capital market history Chapter 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 of various types of investments the implications of market efficiency 10- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh 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- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh 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
