Chapter 9. Risk and resturn: lessons from market history
Two forms of return on investment in shares:
1. Dividend. When a company is profitable, some of the profit is divided amongst the shareholders. This part is the income component of your return. 2. Capital gain/loss. This is the initial worth of the equity minus the end-of-year worth of the equity. This is the second component of your return.(also reffered to a negativ/positive CG)
The total monetary return is the sum of the dividend and the capital gain/loss on the investment.
The total cash if you sold the shares at end-of-year: Total monetary return + initial investment! This is the same as dividends + sale of shares end-of-year.
It is more convenient to summarize information in percentages. Dividend Yield
= (Pt+1 - Pt)/Pt
= Dividend Yield + Capital Gain
Holding period return
= (1 + R1) x (1 + R2) x (1 + R3)
This is the percentage after the 1. It represents the Total return for reinvesting the First year-dividends in the stock market for 2 more years and reinvesting the second year dividends for the final year.
Mean = Ṝ = (R1 + … + RT) / T
Risk premium = Difference between risky returns and Riskfree return Real return = Ṝ minus inflation
Return = mean
Risk = standard deviation
Chapter 13: Corporate Financing Decisions and Efficient Markets There are three ways to create valuable financing opportunities: 1. Investors lack an understanding of the risk an d valuation of complex securities. But as investors are not that easy to fool, the complex securities will sell for more than the normal shares. 2. Reduce cots or increase subsidies.
3. Create a new security.
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