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Chapter 10

COMM 121 Chapter Notes - Chapter 10: Cash Flow, Capital Market, Dividend Yield

Course Code
COMM 121
Blair Robertson

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Chapter 10: Risk and Return: Lessons from Market History
Dollar Earnings
Come in the form of dividends and capital gains
o Total Earnings = Dividends + capital gains (loss)
If you decide to sell the stock your earnings = Initial investments + total returns
A capital gain is every bit a part of your return as the dividend (even if you don’t sell and
don’t actually get that cash flow) did not realize the gain but if you wanted to you
could sell it tomorrow and get the cash value of the stock
Percentage Returns of Rate of Return
The question is, how much do I get for every dollar I invest?
Expressing the dividend as a percentage of the beginning stock price results in the
dividend yield = Dt+1/Pt
Second component on percentage return is the capital gains yield
o = (Pt+1-Pt)/Pt
o Total Returns (Rt+1) = Dt+1/Pt + (Pt+1-Pt)/Pt
Holding-Period Returns
Investors look to capital market history as a guide to the risks and returns of alternative
portfolio strategies
Historical rates of return on five important types of financial investments
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