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Lecture

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Department
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
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:
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
return.
Two key observations emerge.
oFirst, there is a substantial reward, on average, for bearing risk.

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Description
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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