Equity Risk & Return Flashcards
common stock
ownership
company management
ownership
common stockholders represent an ownership interest in the business
company management
the Company’s C-suite wants to increase common share price, as that is largely what drives their bonus
as a result, companies prioritize taking actions which will increase common stock price, and thus returns for shareholders
sources of return in equity
dividends
price appreciation
dividends
optional quarterly cash payments, made from the company to the shareholders
price appreciation
increases in stock price
S&P 500 returns
the S&P 500 is an index comprised of 500 large companies listed on stock exchanges in the united states
sources of risk in equity
price declines
price declines
a decline in the share price over the holding period would reduce aggregate returns
equity has
variable returns *unlike every other security
equity returns are driven by
quarterly dividends and stock price movements
equity analysis
as a result, equity analysis is largely focused on estimating the return from investing in a stock
inversely, fixed income analysis is based almost entirely on estimating the required return
expected return can be calculated two ways:
by taking a weighted average of the possible outcomes
by looking at the simple average of returns (not geometric average, simple average)
individual security volatility
the most widely accepted measure of volatility is a security’s standard deviation. this is meant to measure how much the price, or return generated, from a security moves from year to year
sharpe ratio
sharpe ratio is used to measure risk adjusted return
= (expected return- risk free rate)/ standard deviation
