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. | Chapter 10 Lecture - Some Lessons from Capital Market History Learning Objectives Chapter 10 Lecture Some Lessons from Capital Market History After studying this chapter, you should be able to: LO1 Calculate the return on an investment. LO2 Discuss the historical returns on various important types of investments. LO3 Explain the historical risks important types of investments. on various LO4 Assess the implications of market efficiency 10- 1 10- 2 Dollar & Percent Returns 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 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- 3 10- 4 1 Chapter 10 Lecture - Some Lessons from Capital Market History Example: Calculating Total Dollar and Total Percent Returns Percent Return Dividend Yield Capital Gains Yield DY 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? Dt 1 Pt CGY Pt 1 Pt Pt % Return DY CGY D Pt 1 Pt % Return t 1 Pt Dollars Percent $ $2/25 = 8% Capital Gain $35 - $25 = $10 Total Return $2 + $10 = $12 $10/25= 40% $12/$25 = 48% Dividend 10- 5 10- 6 Year-to-Year Total Returns Large-Company Stock Returns 10- 7 10- 8 2 Chapter 10 Lecture - Some Lessons from Capital Market History Year-to-Year Total Returns Year-to-Year Total Returns Small-Company Stock Returns Long-Term Government Bond & . Treasury Bill Returns 10- 9 10- 10 Average Returns: The First Lesson 1926 - 2014 Year-to-Year Inflation Year-to-Year Percentage Change in the .
