Beruflich Dokumente
Kultur Dokumente
Overview
1.
2.
3.
4.
FIN3000, Liuren Wu
or loss on an investment.
FIN3000, Liuren Wu
Example
Example 1: You invested in 1 share of Apple
(AAPL) for $95 and sold a year later for $200. The
company did not pay any dividend during that
period. What will be the cash return on this
investment?
FIN3000, Liuren Wu
ANWERS
Cash return (dollar return) = 200+0-95=105
Rate of return =105/95=1.1053=110.54%.
FIN3000, Liuren Wu
Beginning
Price
Company A
Ending
Price
Dividend
Dollar P&L
Rate of Return
D=C+B-A
E=D/A
DKS
15.32
22.69 $
DUK
16.38
EMR
32.73
SHLD
WMT
7.37
48.11%
15.82 $
1.16 $
0.60
3.66%
37.75 $
1.32 $
6.34
19.37%
57.74
67.86 $
10.12
17.53%
55.81
49.68 $
1.06 $
(5.07)
-9.08%
FIN3000, Liuren Wu
Comments
Table 7-1 indicates that the returns from investing
performance.
FIN3000, Liuren Wu
FIN3000, Liuren Wu
FIN3000, Liuren Wu
Risk
In the example on Table 7-2, the expected return is
FIN3000, Liuren Wu
Example
Let us compare two possible investment
alternatives:
11
FIN3000, Liuren Wu
Probability Distribution
The probability distribution of an investments
12
FIN3000, Liuren Wu
FIN3000, Liuren Wu
returns:
Treasury Bill: 5%
+.1x40%=15%.
We can also compute the variance and standard
deviation:
Treasury: Variance=0.
Stock: .1x(-10%-15%)2+.2x(5%-15%)2+.2x(25%-
FIN3000, Liuren Wu
15
FIN3000, Liuren Wu
Risk-return comparison
Investment
Expected
Return
Standard
Deviation
Treasury Bill
5%
0%
15%
12.85%
Common
Stock
FIN3000, Liuren Wu
2nd year.
Simple average = (20%-50%) 2 = -15%
Geometric (compound) average: {($15/$25) 1/2} - 1 =
22.54%
17
FIN3000, Liuren Wu
FIN3000, Liuren Wu
Example
Compute the arithmetic and geometric average for
the following stock.
Year
Annual Rate
of Return
Value of the
stock
$25
40%
$35
-50%
$17.50
19
FIN3000, Liuren Wu
ANSWERS
Arithmetic Average = (40-50) 2= -5%
Geometric Average
= (17.5/25)1/2-1=-16.33%.
20
FIN3000, Liuren Wu
Appropriate Average
Calculation:
The arithmetic
average calculated
using annual rates of
return.
The geometric
average calculated
over a similar past
period.
21
FIN3000, Liuren Wu
FIN3000, Liuren Wu
2.
3.
23
FIN3000, Liuren Wu
24
FIN3000, Liuren Wu
25
FIN3000, Liuren Wu
Example: Overconfidence
For example, overconfident investors may
26
FIN3000, Liuren Wu
27
FIN3000, Liuren Wu
28
FIN3000, Liuren Wu
Trend
Following the publication of academic research on market
FIN3000, Liuren Wu