12-0 Some Lessons from Capital Market History Chapter 12 Copyright © 2013 by The McGraw-Hill...
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Transcript of 12-0 Some Lessons from Capital Market History Chapter 12 Copyright © 2013 by The McGraw-Hill...
![Page 1: 12-0 Some Lessons from Capital Market History Chapter 12 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.](https://reader036.fdocuments.us/reader036/viewer/2022062518/56649e115503460f94afd6ec/html5/thumbnails/1.jpg)
12-1
Some Lessons from Capital Market History
Chapter 12
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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Chapter Outline
• Return Definitions
Dollar Return vs. Percentage Return
• Historical ReturnsAverage Returns & Variability of Returns
• Capital Market Efficiency
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Return Definitions: Dollar Returns
• Total dollar return = income from investment + capital gain (loss) due to change in price
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Return Definitions: Percentage Returns
• Total percentage return =
(income from investment + capital gain)
beginning price
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Return ExampleYou buy a stock for $20 per share. At the end of the year the price is $30 per share. During the year you received a $3 dollar dividend per share.
1. What is the dividend yield?
2. What is the capital gains yield?
3. What is the total percentage return?
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Return Example
In the previous example, if you had invested $1,000, how much in dividends, capital gain, and total dollar return would you have received?
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Historical Returns, 1925-2010
Risk Premium
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Risk Premiums
• Risk Premium: The “extra” return earned for taking on risk
• Risk premium = return - risk free rate
• Treasury bills are considered to be risk-free
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Historical Returns: Average Returns
• Average Returns = sum of returns / # of observations (T)
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T
RRRR T
...21
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Historical Returns: Variance and Standard
Deviation of Returns• Variance and standard deviation measure
the volatility of asset returns• Historical variance = sum of squared
deviations from the mean / (number of observations – 1)
• Standard deviation = square root of the variance 10
1
)(...)( 2212
T
RRRRVAR T
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Example
Calculate the average return and the standard deviation for the following return series:
Year Return Avg. Return Deviation Deviation2
2007 0.30
2008 0.45
2009 0.12
2010 -0.15
2011 0.24
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Summary of Historical Returns 1926-2010
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Normal Distribution• A large enough sample drawn from a normal
distribution looks like a bell-shaped curve.
In what range do the returns of large company stocks fall 68% (2/3) of the time? Avg: 11.9%, SD: 20.4%Range = avg. return +/- z (SD) => .119 +/- 1(.204)= & 13
68% => z=1
95% => z=2
99% => z=3
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Efficient Capital Markets
• Stock prices are in equilibrium or are “fairly” priced.
• If this is true, then you should not be able to earn “abnormal” or “excess” returns.
• Three forms of market efficiency:- weak, semi-strong, and strong-form
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Forms of Market Efficiency• Weak Form: Prices reflect all past
(historical) market information such as price and volume=>abnormal returns cannot be earned based on historical information
• Semi-Strong Form: Prices reflect all publicly available information including trading information, annual reports, press releases, etc.=>abnormal returns cannot be earned based on public information
• Strong Form: Prices reflect all information, including public and private=>abnormal returns cannot be earned based on private information 15
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The Record of Mutual Funds
Taken from Lubos Pastor and Robert F. Stambaugh, “Mutual Fund Performance and Seemingly Unrelated Assets,” Journal of Financial Economics, 63 (2002).
-2.13%
-8.45%
-5.41%
-2.17% -2.29%
-1.06%-0.51%-0.39%
All funds Small-companygrowth
Other-aggressive
growth
Growth Income Growth andincome
Maximumcapital gains
Sector
Annual return performance of different types of US mutual funds relative to a broad-based market index (1963 – 1998). Annual return performance of different types of US mutual funds relative to a broad-based market index (1963 – 1998).
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