FINE 2000 Chapter Notes - Chapter 11: Covariance, Systematic Risk, Squared Deviations From The Mean
23 Apr 2016
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Chapter 11 introduction to risk, return, and the opportunity cost of capital. Percentage return = capital gain + dividend / initial share price. Dividend yield = dividend / initial share price. Percentage capital gain = capital gain / initial share price. To convert from a nominal to real rate of return, we use the following relationship: 1 + real rate of return = 1 + nominal rate of return / 1 + inflation rate. Maturity premium: extra average return from investing in long-term bonds versus short-term treasury securities. Risk premium: expected return in excess of risk-free return as compensation for risk, the compensation for taking on risk of common stock ownership: Rate of return on common stock = interest rate on treasury bills + market risk premium. The expected return on an investment provides compensation for investors both for waiting (the time value of money) and for worrying (the risk of the particular asset).
