risk and return
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Risk and Return
Rates of Return
Return comes in two forms: (1) a dividend or interest payment, and (2) a capital gain or capital loss.
For eg. You buy the stock of ABB at the beginning of 2003 when its price was about Rs. 250. By the end of the year the price appreciated to Rs 500 a share. In addition ABB paid a dividend of Rs 2.20 per share
The percentage return on your investment was therefore: Percentage Return = (capital gain + dividend)/ initial share price
= (250+2.2) / 250 = 100.88 %
1
14.94
44.18
2350.89
100
1000Treasury billsLong term treasury bondsCommon stocks (S & P 500)
1925 1999
Portfolio Average Annual Rate of Return
Average Risk Premium (Extra return versus Treasury Bills)
Treasury Bills 3.8
Treasury bonds 5.7 1.9
Common stocks 13.2 9.4
Maturity premium: The difference between Long term government bonds and treasury billsMarket risk premium: Difference between rate of return on common stock and interest rate on treasury bills
Rate of return on = interest rate on + market common stocks Treasury bills risk premium
Measuring risk
• Normal distribution• Standard deviation• Variance
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