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lecture_1 notes.docx

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Administrative Studies
Course Code
ADMS 3531

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Personal Investment Management
ADMS 3531 - Fall 2011 – Professor Dale Domian
Lecture 1, Part 1 – A Brief History of Risk and Return – Sept 13
Chapter One Outline
The historical record.
Average Returns.
Return Variability.
Arithmetic versus Geometric Returns.
Risk and Return.
Tulipmania and Stock Market Crashes.
Who wants to be a Millionaire?
You can retire with one million dollars (or more). How? Suppose this:
oYou invest $300 per month.
oYour investments earn 9% per year.
oYou trade, or ‘turn-over’ 20% of your investments each year.
oThe federal and provincial government take about 30% of your investment
earnings each year.
oIf inflation is zero, it will take you about 41 years.
However, if inflation is 3% per year, it will take you about 60 years.
Suppose you decide to take advantage of deferring taxes on your investments and
oYou invest $300 per month.
oYour investments earn 9% per year.
If inflation is zero, it will take you about 36 years.
If inflation is 3%, it will take you about 49 years.
You can cut 49 years to 31 years, IF you invest $500 per month at 12%. Realistic?
o$250 is about the size of a new car payment, and perhaps your employer will kick
in $250 per month.
oOver the last 25 years, the S&P/TSX index return was about 12%.
A Brief History of Risk and Return
We will find out in this chapter what financial market history can tell us about risk and
Two key observations emerge.
oFirst, there is a substantial reward, on average, for bearing risk.

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Personal Investment Management ADMS 3531 ­ Fall 2011 – Professor Dale Domian Lecture 1, Part 1 – A Brief History of Risk and Return – Sept 13 Chapter One Outline − Returns. − The historical record. − Average Returns.  − Return Variability.  − Arithmetic versus Geometric Returns.  − Risk and Return.  − Tulipmania and Stock Market Crashes.  Who wants to be a Millionaire? − You can retire with one million dollars (or more). How? Suppose this: o You invest $300 per month.  o Your investments earn 9% per year. o You trade, or ‘turn­over’ 20% of your investments each year. o The federal and provincial government take about 30% of your investment  earnings each year.  o If inflation is zero, it will take you about 41 years.  − However, if inflation is 3% per year, it will take you about 60 years.  − Suppose you decide to take advantage of deferring taxes on your investments and o You invest $300 per month.  o Your investments earn 9% per year. − If inflation is zero, it will take you about 36 years.  − If inflation is 3%, it will take you about 49 years.  − You can cut 49 years to 31 years, IF you invest $500 per month at 12%. Realistic? o $250 is about the size of a new car payment, and perhaps your employer will kick  in $250 per month.  o Over the last 25 years, the S&P/TSX index return was about 12%. A Brief History of Risk and Return − We will find out in this chapter what financial market history can tell us about risk and  return.  − Two key observations emerge.  o First, there is a substantial reward, on average, for bearing risk.  o Second, greater risks accompany greater returns. Dollar Returns − Total dollar return is the return on an investment measured in dollars, accounting for all  interim cash flows and capital gains or losses.  − Total return on a stock = dividend income + capital gain (or loss) Percent Returns − Total percent return is the return of an investment measured as a percentage of the  original investment. The total percent return is the return for each dollar invested. − Percent return on a stock = [Dividend income + capital gain (or loss)] / [Beginning stock  price]; OR  − Percent return = [total dollar return on a stock] / [beginning stock price (i.e. beginning  investment)] Total Dollar and Total Percent Returns − Suppose you invested $1,000 in a stock with a share price of $25.  − After one year, the stock price per share is $35.  − Also, for each share, you received a $2 dividend. − What was your total dollar return? o $1,000 / $25 = 40 shares o Capital gain: 40 shares times $10 = $400.  o Dividends: 40 shares times $2 = $80. o Total dollar return is $400 + $80 = $480. − What was your total percent return?
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