Đang tải... (xem toàn văn)
This lecture introduces you to some lessons from capital market history. After completing this unit, you should be able to: Know how to calculate the return on an investment, understand the historical returns on various types of investments, understand the historical risks on various types of investments.
Some lessons from capital market history Chapter 10 Key concepts and skills Understand: – how to calculate the return on an investment – the historical returns on various types of investments – the historical risks of various types of investments – the implications of market efficiency Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-2 Chapter outline • • • • Returns The historical record Average returns: The first lesson The variability of returns: The second lesson • More on average returns ã Capital market efficiency Copyright â2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-3 Risk, return and financial markets • We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets • Lessons from capital market history: – There is a reward for bearing risk – The greater the potential reward, the greater the risk – This is called the risk–return trade-off Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-4 Dollar returns • Total dollar return = the return on an investment measured in dollars • $ return = Dividends + Capital gains • Capital gains = Price received – Price paid • Example: – You bought a bond for $950 one year ago You have received two coupons of $30 each You can sell the bond for $975 today What is your total dollar return? • Income = 30 + 30 = $60 • Capital gain = 975 – 950 = $25 • Total dollar return = 60 + 25 = $85 Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-5 Percentage returns • It is generally more intuitive to think in terms of percentages than dollar returns • Total percentage return = the return on an investment measured as a percentage of the original investment – % return = $ return/$ invested Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-6 Percentage returns (cont.) Dividend Yield DY Dt Pt Capital Gains Yield CGY Pt Pt Pt % Return DY CGY Dt Pt Pt % Return Pt Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-7 Calculating returns Example 10.1 • You invest in a stock with a share price of $25 • After one year, the stock price per share is $35 • Each share paid a $2 dividend • What was your total return? Dollars Percentage $2.00 $2/25 = 8% Capital gain $35 - $25 = $10 $10/25= 40 % Total return $2 + $10 = $12 $12/$25 = 48% Dividend Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-8 The historical record A first look— Figure 10.4 $1 invested in three major domestic classes as from the beginning of 1900 Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-9 Quarter-by-quarter returns • All Ordinaries Index—Figure 10.5 Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-10 The normal distribution Figure 10.11 Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-25 Arithmetic vs geometric mean • Arithmetic average – Return earned in an average period over multiple periods – Answers the question: ‘What was your return in an average year over a particular period?’ • Geometric average – Average compound return per period over multiple periods – Answers the question: ‘What was your average compound return per year over a particular period?’ • Geometric average < arithmetic average, unless all the©2011 returns are equal Copyright McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-26 Geometric average return: Formula GAR ( R1 ) ( R2 ) ( RN) GAR T /T Equation 10.4 1/ T (1 Ri ) i Where: Π = product (like Σ for sum) Ri = return in each period T = number of periods Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-27 Calculating a geometric average return—Example 10.4 Year Mar-93 Jun-93 Sep-93 Dec-93 Mar-94 Jun-94 Sep-94 Dec-94 Percent Return 8.42 5.35 13.72 11.91 -4.84 -2.19 2.72 -4.48 One Plus Return 1.0842 1.0535 1.1372 1.1191 0.9516 0.9781 1.0272 0.9552 (1.4870)^(1/8): Geometric Average Return: Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh Compounded Return: 1.0842 1.1422 1.2989 1.4536 1.3833 1.3530 1.3898 1.3275 1.0360 3.60% 10-28 Arithmetic vs geometric mean Which is better? • The arithmetic average is overly optimistic for long horizons • The geometric average is overly pessimistic for short horizons • Depends on the planning period under consideration – 15–20 years or less: use arithmetic average – 20–40 years or thereabouts: split the difference between them – 40 + years: use the geometric average Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-29 Efficient capital markets • The efficient market hypothesis – Stock prices are in equilibrium – Stocks are ‘fairly’ priced – Informational efficiency • If true, you should not be able to earn ‘abnormal’ or ‘excess’ returns • Efficient markets DO NOT imply that investors cannot earn a positive return on the stock market Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-30 Reaction of stock price to new information in efficient and inefficient markets Figure 10.12 Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-31 What makes markets efficient? • There are many investors out there doing research – As new information comes to market, this information is analysed and trades are made based on this information – Therefore, prices should reflect all available public information • If investors stop researching share prices, the market will no longer be efficient Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-32 Common misconceptions about EMH • EMH does not mean that you can’t make money • EMH does mean that: – on average, you will earn a return appropriate for the risk undertaken – there is no bias in prices that can be exploited to earn excess returns – market efficiency will not protect you from wrong choices if you not diversify—you still don’t want to put all your eggs in one basket Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-33 Forms of market efficiency Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-34 Strong-form efficiency • Prices reflect all information, including public and private • If the market were strong-form efficient, investors could not earn abnormal returns regardless of the information they possessed • Empirical evidence indicates that markets are NOT strong-form efficient and that insiders can earn abnormal returns Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-35 Semistrong-form efficiency • Prices reflect all publicly available information, including trading information, annual reports and press releases • If the market is semistrong-form efficient, investors cannot earn abnormal returns by trading on public information • Implies that fundamental analysis will not lead to abnormal returns Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-36 Weak-form efficiency • Prices reflect all past market information such as price and volume • If the market is weak-form efficient, investors cannot earn abnormal returns by trading on market information • Implies that technical analysis will not lead to abnormal returns • Empirical evidence indicates that markets are generally weak-form efficient Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-37 Quick quiz • Which of the investments discussed have had the highest average return and risk premium? • Which of the investments discussed have had the highest standard deviation? • What is capital market efficiency? • What are the three forms of market efficiency? Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 10-38 Chapter 10 END 10-39 ... Understand: – how to calculate the return on an investment – the historical returns on various types of investments – the historical risks of various types of investments – the implications of market. .. and financial markets • We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets • Lessons from capital market history: – There is a... bearing risk – The greater the potential reward, the greater the risk – This is called the risk–return trade-off Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance