Nama: Randrianantenaina Solohery Mampionona Aime

NIM: 041924353041

Chapter 10 Lessons from Market History

Investing in a company is a challenge. We can benefit (gain) but on the other hand, we can
also lose
10.1 Returns
we may get 3 different types of returns after doing an investment: dividend, capital gain or
capital loss.
Dollar returns Percentage returns
Dividend income = dividend paid x total number of Dividend yield = Dt+1/Pt
shares Capital gain = (Pt+1−Pt)/Pt
Capital gain or capital loss= (Pt+1−Pt) x total number of Total return Rt+1
shares D t+1 ( Pt +1−Pt )
Total dollar return = Dividend income + Capital gain (or ¿ Pt + Pt
loss)
Total cash if stock is sold=Initial investment +
Total dollar return
Dt+1: dividend paid on the stock during the Pt: price of the stock at the beginning of the
year year
Pt+1: price of the stock at year-end
Rt+1 : total return on the investment

10.2 Holding period return

Holding period return is the return on an asset or portfolio over the whole period during
which it was held. It is one of the simplest and most important measures of investment
performance. HPR is the change in value of an investment, asset or portfolio over a particular
period.
HPR= [(1+R1)×(1+R2)×(1+R3)]-1
10.3 Return Statistics
R 1+ R 2+ …+ RT
Mean (average)=
T
10.4 Average Stock Returns and Risk-Free Returns
1. Average Stocks, an index performing figure which would be reckoned by a formula
issued by managers and buyers.
2. Risk free, an application were the principal is assured, and would have a certain return
under some previewed circumstances.
10.5 Risk statistics
Statistical risk is a quantification of a situation's risk using statistical methods. The more
spread the distribution is, the more uncertain the returns are.
1
Var= [(R - Ŕ )2+(R2- Ŕ )2+(R3- Ŕ )2+(R4- Ŕ )2] SD=√ var
T −1 1
Nama: Randrianantenaina Solohery Mampionona Aime
NIM: 041924353041

Sharpe RatioThe Sharpe ratio is the average equity risk premium over a period of time
divided by the standard deviation.
risk premium
SR=
SD
10.6 More on Average Returns
We can calculate the average return in 2 different ways:
1. The arithmetical method is the return in an average year over a particular period. It is
used for making estimates of the future.
2. The geometrical method is the average compound return per year over a particular
period. It is used for describing the actual historical investment experience
Geometric average return =[(1+R1)×(1+R2)×⋯×(1+RT)]1/T−1
10.7 The U.S. Equity Risk Premium: Historical and International Perspectives
Equity risk premium refers to the excess return that investing in the stock market provides
over a risk-free rate. This excess return compensates investors for taking on the relatively
higher risk of equity investing.
SD( R)
SE=
√ number of observation