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LN07Titman 449327 12 LN07
LN07Titman 449327 12 LN07
An Introduction
to Risk and
ReturnHistory of
Financial Market
Returns
Slide Contents
Learning Objectives
Principles Applied in This Chapter
1. Realized and Expected Rates of Return and
Risk.
2. A Brief History of Financial Market Returns
3. Compute Geometric and Arithmetic Average
Rates of Return.
4. What Determines Stock Prices?
Key Terms
Expected Return
= (-10%0.2) + (12%0.3) + (22%0.5)
= 12.6%
Figure 7.5
Investing in
Emerging
Markets:
19882011
Geometric Average
= [(1+Ryear1) (1+Ryear 2)]1/2 - 1
= [(1.4) (.5)] 1/2 - 1
= -16.33%
Value of Stock
$18,000.00
$16,000.00
$14,000.00
$12,000.00
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00
0 1 2 3 4 5 6
Year
Arithmetic Average
= Sum of the annual rates of return Number of
years
= 45% 5 = 9%
Based on past performance of the stock,
Mary should expect that it would earn 9%
next year.
= 7.41%