Textbook Notes (363,143)
United States (204,418)
Finance (9)
FNBU 3221 (9)
Gary Frey (9)
Chapter 12

FNBU 3221 Chapter 12: Chapter 12

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Fordham University
FNBU 3221
Gary Frey

Chapter 12 Returns  Dollar returns o 2 components of ROI: income component & change in value o o o o  Percentage returns o Usually more convenient to summarize info about returns in percentage terms instead of dollar terms o o The Historical Record  A 1 look o Initially appears that small cap stocks have highest returns since 1925  A closer look o Small cap stocks fluctuated most Average Returns: The First Lesson  Calculating average returns o Add up yearly returns & divide by number of years  Average returns: the historical record o Stock returns much larger than bond returns  Risk premiums o Risk-free return—rate of return on debt that is virtually default risk-free o Risk premium: excess return required from investment in risky asset over that required from risk-free investment st  1 lesson o There is reward for bearing risk The Variability of Returns: The Second Lesson  Frequency distributions & variability o Variance: average squared difference between actual return & average return o Standard deviation: positive square root of variance  Historical variance & standard deviation o Bigger variance=more actual returns tend to differ from average return o Larger variance/standard deviation=more spread out returns will be  Historical record o Stocks have larger standard deviation than bonds  Normal distribution o Normal distribution: symmetric, bell-shaped frequency distributi
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