Textbook Notes (368,326)
Canada (161,799)
Finance (362)
FIN 501 (31)
Chapter 1

Chapter 1 A Brief History of Risk and Return.docx

1 Page
Unlock Document

FIN 501
Edward Blinder

FIN501 investment analysis I CHAPTER 1 A BRIEF HISTORY OF RISK AND RETURN RETURNS  Returns on an investment have two components: 1. May receive some cash directly while you own the investment 2. Value of the asset you purchase may change  Total dollar return: return on investment measured in dollars that accounts for all cash flows and capital gains/losses TOTAL DOLLAR RETURN = DIVIDEND INCOME + CAPITAL GAIN (OR LOSS)  Dividend yield: annual stock dividend as a percentage of the initial stock price DIVIDEND YIELD = D t+1/ Pt  Capital gains yield: the change in stock price as a percentage of the initial stock price CAPITAL GAINS YIELD = (P t+1– Pt) / t  Total percent return: return on an investment measured as a percentage that accounts for all cash flows and capital gains or losses PERCENTAGE RETURN = DIVIDEND YIELD + CAPITAL GAINS YIELD AVERAGE RETURN  Average returns for investments do not reflect the impact of inflation  Risk-free rate: rate of return on a riskless investment  Risk premium: extra return on a risky asset over the risk-free rate; the reward for bearing risk RETURN VARIABILITY  Variance: common measure of volatility; measures the average squared difference between the actual returns and the average return o The bigger the number, the more the actual returns tend to differ from the average return 2 2 2 VAR(R) = [(R 1 R) + (R –2R) + ... + (R N R) ] / (N – 1)  Standard deviation (SD): square root of the variance EX. Calculating historical variance, particular investment has returns of 10%, 12%, 3%, -9% over the last four years.
More Less

Related notes for FIN 501

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.