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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
CHAPTER
9 Risk and ReturnLessons from
Market History
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Slide 2
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
Dollar Return = Dividend + Change in Market Value
Returns
yield gains capitalyield dividend
uemarket val beginning
uemarket valin change dividend
uemarket val beginning
returndollar return percentage
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Slide 3
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
Historical Returns, 1926-2004
Source: © Stocks, Bonds, Bills, and Inflation 2006 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.
Average Standard
Series Annual Return Deviation Risk Premium Large Company Stocks12.3% 20.2% 8.5%
Small Company Stocks 17.4 32.9 13.6%
Long-Term Corporate Bonds 6.2 8.5 2.4%
Long-Term Government Bonds 5.8 9.2 2.0%
U.S. Treasury Bills 3.8 3.1
Inflation 3.1 4.3
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Slide 4
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
The Risk-Return Tradeoff
2%
4%
6%
8%
10%
12%
14%
16%
18%
0% 5% 10% 15% 20% 25% 30% 35%
Annual Return Standard Deviation
Ann
ual R
etur
n A
vera
ge
T-Bonds
T-Bills
Large-Company Stocks
Small-Company Stocks