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Chapter 1

CFIN501- Chapter 1- Brief History of Risk and Return.docx

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Course Code
FIN 501
Edward Blinder

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CFIN501 Chapter 1 Brief History of Risk and ReturnReturnsDollar ReturnsReturngain or loss from investmentoTwo componentsReceive some cash directly while you own the investmentValue of asset purchase may changeShareholderentitled to a portion of any money distributed dividendsCapital gain or loss on stockoCapital loss negative capital gainTotal dollar returnreturn on an investment measured in dollars that accounts for all cash flows and capital gains or lossesTotaldollarreturnDividendincomeCapitalgainlossConsider capital gain if as part of return if decided to hold investmentoInsist on concerting gain to cashsell stock and immediately reinvesting by buying stock backPercentage ReturnsReturn doesnt depend on how much you actually investedDividend yield annual stock dividend as a percentage of the initial stock priceDividendyieldDPt1tCapital gains yieldchange in stock price as a percentage of the initial stock priceCapitalgainsyieldPPPt1ttTotal percent returnreturn on an investment measured as a percentage that accounts for all cash flows and capital gains or lossesDPPt1t1tPercentagereturnPPttA Note on Annualizing ReturnsCompare investmentsexpress returns on a per year or annualized basisEffective annual return EARreturn on an investment expressed on a peryear or annualized basis1periodreturnholding1EARHistorical RecordReturns can be interpretedwhat you would have earned if you had invested in portfolios of the following asset categories1Large company stocksStandardsPoors SP 500 index 500 largest companies in the US2Small company stocks20 of companies listed on the New York Stock ExchangeMeasured by marker value of outstanding stock3Long term corporate bondsHigh quality Bonds with 20 years maturity4Long term US government bonds20 years maturity5US treasury bills3 month maturityCPIstandard measure of consumer goods price inflationCompanys total market capitalization stock price multiplied by the number of shares of stocksoTotal value of the companys stock1
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