Ch 12-Lessons from History Flashcards
what are non financial assets?
REAL assets: not stocks and not bonds
Risk return tradeoff
THHE GREATER THE RISK THE GREATER THE REWARD
Risk: measured in standard deviation
Return: measured in %
What is total dollar return?
income from investment + capital gain (loss) due to change in price
income from investment: the coupons
capital gain: the change in the actual price of bond
P1-Po + D = dollar return formula
What is percentage returns
div yield= income/beginning price (D/p)
cap gain yield= (end price- begin price)/begin price
total % return= div yield +cap gain yield
THINKING IN PERCENTAGES IS OFTEN EASIER THAN DOLLARS
Percent returns on bonds
P1/P0 - 1 + coupon rate
or
(P0- P1 + D)/ P0 = total percentage return of the bond
fisher equaiton
(1+R)= (1+r)(1+h)
R= nominal
r= real
h= inflation
Why do people buy bonds?
Because the standard deviation is generally lower!! meaning that good years arent that good but more importantly BAD YEARS ARE NOT THAT BAD
-> THEY HAVE LOWER STANDARD DEVIATION
Within one standard deviaiton, how much area is covered?
Within2?
Within 3?
2/3
19/20
Most
How to find SD in calculator
- List all the returns in the column
- Stat > Calc > 1-Var Stats
- List: L1 FreqList: EMPTY Caclaulte
xbar= v
Why should you leave FreqList blank?
Because it is asking how often you should use the list
What is the arithmetic avg
Geometric avg?
-50 and 50, avg is 0
geometric [(1+return)(1+return2)]^1/2 -1
When Is the geometric average a lot different from you rarithmetic average
when you have a really bad year !!! when you have a really good year
IF THE YEARS ARE RELATIVELY CHILL THEN YOUR ARITHMETIC AVERAGE IS ABOUT THE SMAE AS THE GEOMETRIC AVERAGE
TWO LESSONS FROM HISTORY
1) there is a reward for bearing risk
2) the greater the risk the greater the reward
What are the two components of return
give an ex
1) income: any cash you recieve while you own the invetment
2) capital gain/loss: any change in value of the asset while you own it
ex: if you hold a stock, you may recieive dividend, and if you wanna sell it the price may have changed (this is cap gain/loss)
Formula for total dollar return
TDR= Div income + Cap Gain/Loss
If you sold stock at the end of the year, what is the total amt of cash you owuld have?
Total cash if stock is sold= initial investment + total return
What are percentage returns
Percentage return = (div paid at end of period + change in market value over period)/ begin market value
1+ % return = (Div ppaid at end of period + MV at end of period)/begin MV
OR
DIV YIELD + CAP GAINS YIELD
wHAT IS FIVIDEND YIELD
tells you how much you get in dividends for each dollar you invest
Div Yield= Dt/Pt
What is cap gains yield
Cap gains yield = (Pt+1 - Pt)/Pt
Pt= current price of stok
WHAT ARE THE 6 TYPES OF PORTFOLIOS?
- canadian common stocks
- usa common stocks
- tsx venture stocks
- small stocks
- long bonds
- canada treasury bills
if stocks perform the best as investments, why would people invest in others like tbilss and long term bonds?
they grow steadily even though they grow sloly
how do you calculate expected return
arithmetic average
sum of n/n