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 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Returns The Historical Record Average Returns: The First Lesson The Variability of Returns: The Second Lesson Capital Market Efficiency 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Risk, Return and Financial Markets We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets Lesson 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Dollar Returns Total dollar return = income from investment + capital gain (loss) due to change in price Example: You bought a bond for $950 1 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Be sure to emphasize that you do not have to actually sell the stock for you to earn the dollar return. The point is that you could. Percentage Returns It is generally more intuitive to think in terms of percentages | Some Lessons from Capital Market History Chapter 10 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 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Chapter Outline Returns The Historical Record Average Returns: The First Lesson The Variability of Returns: The Second Lesson Capital Market Efficiency 10- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Risk, Return and Financial Markets We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets Lesson from capital market history There is a reward for bearing risk The greater the .
