Slides_Fundamentals of Investments - Chapter 1 ppt

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C h a p t e r
A Brief History of Risk and ReturnA Brief History of Risk and Return
second edition
Fundamentals
of
Investments
Valuation & Management
Charles J.Corrado Bradford D.Jordan
McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu
@2002 by the McGraw- Hill Companies Inc.All rights reserved.
© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Who Wants To Be A Millionaire?
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A Brief History of Risk and Return
Our goal in this chapter is to see
what financial market history can tell
us about risk and return.
Goal
 Two key observations emerge.
c There is a reward for bearing risk, and at least on
average, that reward has been substantial.
d Greater rewards are accompanied by
greater risks.
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Returns
Example
Total dollar return
=
Dividend
+
Capital gain
on stock income (or loss)
Total dollar return
The return on an investment measured in
dollars that accounts for all cash flows and
capital gains or losses.
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Returns
Example
Percent return
=
Dividend
+
Capital gains
on stock yield yield
or
Total dollar return
.
Beginning stock price
Total percent return
The return on an investment measured as a

% of the originally invested sum that
accounts for all cash flows and capital gains
or losses.
It is the return for each dollar invested.
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Returns
Example: Calculating Returns
 Suppose you invested $1,000 in a stock at $25 per
share. After one year, the price increases to $35. For
each share, you also received $2 in dividends.
 Dividend yield = $2 / $25 = 8%
 Capital gains yield = ($35
–
$25) / $25 = 40%
 Total percentage return = 8% + 40% = 48%
 Total dollar return = 48% of $1,000 = $480
 At the end of the year, the value of your $1,000
investment is $1,480.
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Work the Web
 For more information on investments,
check out:

 For more information on common
stocks, check out:




The Historical Record:
A First Look
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McGraw Hill / Irwin
The Historical Record:
A Longer Range Look
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The Historical Record: A Closer Look
Figure 1.3
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The Historical Record: A Closer Look
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The Historical Record: A Closer Look
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The Historical Record: A Closer Look
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The Historical Record: A Closer Look
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Work the Web
 To learn more about global market
history, visit:

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Average Returns: The First Lesson
 Average annual
=
Σ yearly returns
return number of years
Average Returns: The First Lesson
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Average Returns: The First Lesson
Risk-free rate
The rate of return on a riskless investment.
Risk premium
The extra return on a risky asset over the
risk-free rate; the reward for bearing risk.

Average Returns: The First Lesson
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Average Returns: The First Lesson
The First Lesson
 There is a reward, on average, for bearing risk.
Return Variability: The Second Lesson
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Return Variability: The Second Lesson
Variance
A common measure of volatility.
Standard deviation
The square root of the variance.
Normal distribution
A symmetric, bell-shaped frequency
distribution that is completely defined by its
average and standard deviation.
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Return Variability: The Second Lesson

Variance of return
()
()
1
σ
1
2
2
−
−
==
∑
=
N
RR
RVar
N
i
i

where N is the number of returns
Standard deviation of return
(
)
(
)
RVarRSD == σ
Return Variability: The Second Lesson
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Return Variability: The Second Lesson

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