RISK AND RETURN

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RISK AND RETURN
PART 1 CAPITAL MARKET BASICS
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RISK AND RETURN BASICS

• CORPORATE DECISIONMAKERS MUST THINK LIKE
  INVESTORS
• RATIONAL INVESTORS FOCUS ON TWO THINGS RISK AND
  RETURN
• GOOD FINANCIAL DECISIONS REQUIRE QUANTIFICATION
  OF RISK AND RETURN

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QUANTIFYING RETURN

• Total return R (D1 P1 - P0)/P0
• R dividend yield capital gains yield
• D1/P0 (P1 - P0)/P0
• What does history tell us about the nature of
  actual returns?

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HISTORICAL RETURNS SIZE

• Types of return series
• Common stock
• Large-company common stocks
• Small-company common stocks
• Debt issues
• Long-term government bonds
• Short-term government bonds

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HISTORICAL RETURNS VARIABILITY

• Year-to-year variability in the return series
• Distributions of historical returns
• The use of statistics to characterize returns

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IMPLICATIONS OF HISTORICAL RETURNS FOR FUTURE
RETURNSTHE EFFICIENT MARKETS HYPOTHESIS

• The main premise of the EMH
• Forms of the EMH
• Weak-form
• Semistrong-form
• Strong-form
• Which form is true?