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22 Cards in this Set
- Front
- Back
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We can examine returns in the financial markets to help us determine
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the appropriate returns on non-financial assets
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Lessons from capital market history
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There is a reward for bearing risk
The greater the potential reward, the greater the risk This is called the risk-return trade-off |
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Total dollar return =
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income from investment + capital gain (loss) due to change in price
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It is generally more intuitive to think in terms of percentage, rather than
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dollar, returns
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Dividend yield =
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income / beginning price
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Capital gains yield =
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(ending price – beginning price) / beginning price
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Total percentage return =
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dividend yield + capital gains yield
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Financial markets allow companies, governments and individuals to increase
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their utility
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Savers have the ability to invest in financial assets so that they can defer
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consumption and earn a return to compensate them for doing so
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Borrowers have better access to the capital that is available
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so that they can invest in productive assets
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Financial markets also provide us with information about
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the returns that are required for various levels of risk
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The “extra” return earned for
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taking on risk
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Treasury bills are considered to be
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risk-free
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The risk premium is the return over and above
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the risk-free rate
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Variance and standard deviation measure the
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volatility of asset returns
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The greater the volatility,
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the greater the uncertainty
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Historical variance =
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sum of squared deviations from the mean / (number of observations – 1)
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Standard deviation =
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square root of the variance
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Prices reflect all information, including
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public and private
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If the market is strong form efficient, then investors could not earn abnormal returns regardless of the
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information they possessed
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If the market is semistrong form efficient, then investors cannot earn
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abnormal returns by trading on public information
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If the market is weak form efficient, then investors cannot earn abnormal returns by
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trading on market information
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