Slides_Fundamentals of Investments - Chapter 1 ppt

Valuation & ManagementCharles J.Corrado Bradford D.Jordan McGraw Hill / Irwin Slides by Yee-Tien Ted Fu @2002 by the McGraw- Hill Companies Inc.All rights reserved... The Historical Reco

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 McGraw Hill / Irwin

Who Wants To Be A Millionaire?

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

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

Š 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.

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

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

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Returns

Example

Percent return = Dividend + Capital gainson 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.

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Returns

Example: Calculating Returns

Š 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.

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Work the Web

 For more information on investments,

check out:

http://www.investorama.com

 For more information on common

stocks, check out:

http://finance.yahoo.com

http://www.nyse.com

http://www.sec.gov

The Historical Record:

A First Look

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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© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Work the Web

 To learn more about global market

history, visit:

http://www.globalfindata.com

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Average Returns: The First Lesson

Š Average annual = Σ yearly returns

return number of years

Average Returns: The First Lesson

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Average Returns: The First Lesson

Average Returns: The First Lesson

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Average Returns: The First Lesson

The First Lesson

Š There is a reward, on average, for bearing risk

Return Variability: The Second Lesson

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Return Variability: The Second Lesson

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Return Variability: The Second Lesson

Var

N i

i

where N is the number of returns

Standard deviation of return

SD = σ =

Return Variability: The Second Lesson

Return Variability: The Second Lesson

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© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Work the Web

 For an easy-to-read review of basic

statistics, see:

http://www.robertniles.com/stats/

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Return Variability: The Second Lesson

The Second Lesson

Š The greater the potential reward, the greater

the risk

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Return Variability: The Second Lesson

Source: Dow Jones

Top 12 One-Day Percentage Changes in the

Dow Jones Industrial Average

Risk and Return

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© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Risk and Return

Š The risk-free rate represents compensation for

just waiting So, it is often called the time

value of money.

Š If we are willing to bear risk, then we can

expect to earn a risk premium, at least on average

Š Further, the more risk we are willing to bear,

the greater is that risk premium

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A Look Ahead

Š We will learn how to value different assets and make informed, intelligent decisions about the associated risks

Š We will also discuss different trading

mechanisms and the way different markets function

This text focuses exclusively on financial assets: stocks, bonds, options, and futures

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Chapter Review

Š Average Returns: The First Lesson

Î Calculating Average Returns

Î Average Returns: The Historical Record

Î Risk Premiums

Î The First Lesson

© 2002 by The McGraw-Hill Companies, Inc All rights reserved McGraw Hill / Irwin

Chapter Review

Š Return Variability: The Second Lesson

Î Frequency Distributions and Variability

Î The Historical Variance and Standard Deviation

Î The Historical Record

Î Normal Distribution

Î The Second Lesson

Š Risk and Return

Î The Risk-Return Trade-Off

Î A Look Ahead