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Lecture Fundamentals of corporate finance - Chapter 12: Some lessons from capital market history

The goal in this chapter is to provide a perspective on capital market history. After studying this chapter, you should understand: How to calculate the return on an investment, the historical returns on various important types of investments, the historical risks on various important types of investments, the implications of market efficiency. | T12.1 Chapter Outline Chapter 12 Some Lessons from Capital Market History Chapter Organization 12.1 Returns 12.2 The Historical Record 12.3 Average Returns: The First Lesson 12.4 The Variability of Returns: The Second Lesson 12.5 Capital Market Efficiency 12.6 Summary and Conclusions CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. T12.2 Risk, Return, and Financial Markets “. . . Wall Street shapes Main Street. Financial markets transform factories, department stores, banking assets, film companies, machinery, soft-drink bottlers, and power lines from parts of the production process . . . into something easily convertible into money. Financial markets . . . not only make a hard asset liquid, they price that asset so as to promote its most productive use.” Peter Bernstein, in his book, Capital Ideas T12.3 Percentage Returns (Figure 12.2) T12.3 Percentage Returns (Figure 12.2) (concluded) Dividends paid at Change in market end of period value over period Percentage return = Beginning market value Dividends paid at Market value end of period at end of period 1 + Percentage return = Beginning market value + + T12.4 A $1 Investment in Different Types of Portfolios: 1948-1999 T12.5 A $1 Investment inflation adjusted: 1948-1999 T12.6 A $1 Investment in Different Types of Portfolios: 1926-1998 (US Comparison) T12.7 Year-to-Year Total Returns on TSE300: 1948-1999 T12.8 Year-to-Year Total Returns on Small Company Common Stocks: 1970-1999 T12.9 Year-to-Year Total Returns on Bonds: 1926-1998 T12.10 Year-to-Year Total Returns on Treasury Bills: 1948-1999 T12.11 Using Capital Market History Now let’s use our knowledge of capital market history to make some financial decisions. Consider these questions: Suppose the current T-bill rate is 5%. An investment has “average” risk relative to a typical share of stock. It offers a 10% return. Is this a good investment? Suppose an investment is similar in risk to buying small . | T12.1 Chapter Outline Chapter 12 Some Lessons from Capital Market History Chapter Organization 12.1 Returns 12.2 The Historical Record 12.3 Average Returns: The First Lesson 12.4 The Variability of Returns: The Second Lesson 12.5 Capital Market Efficiency 12.6 Summary and Conclusions CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. T12.2 Risk, Return, and Financial Markets “. . . Wall Street shapes Main Street. Financial markets transform factories, department stores, banking assets, film companies, machinery, soft-drink bottlers, and power lines from parts of the production process . . . into something easily convertible into money. Financial markets . . . not only make a hard asset liquid, they price that asset so as to promote its most productive use.” Peter Bernstein, in his book, Capital Ideas T12.3 Percentage Returns (Figure 12.2) T12.3 Percentage Returns (Figure 12.2) (concluded) Dividends paid at Change in market end of .