Tài chính doanh nghiệp - Chapter 10: Some lessons from capital market history

Some Lessons from Capital Market HistoryChapter 100Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerKey Concepts and SkillsKnow how to calculate the return on an investmentUnderstand the historical returns on various types of investmentsUnderstand the historical risks on various types of investments1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineReturnsThe Historical RecordAverage Returns: The First LessonThe Variability of Returns: The Second LessonCapital Market Efficiency2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerRisk, Return and Financial MarketsWe can examine returns in the financial markets to help us determine the appropriate returns on non-financial assetsLesson from capital market historyThere is a reward for bearing riskThe greater the potential reward, the greater the riskThis is called the risk-return trade-off3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerDollar ReturnsTotal dollar return = income from investment + capital gain (loss) due to change in priceExample:You bought a bond for $950 1 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 = $60Capital gain = 975 – 950 = $25Total dollar return = 60 + 25 = $854Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerPercentage ReturnsIt is generally more intuitive to think in terms of percentages than dollar returnsDividend yield = income/beginning priceCapital gains yield = (ending price – beginning price)/beginning priceTotal percentage return = dividend yield + capital gains yield5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample – Calculating ReturnsYou bought a share for $35 and you received dividends of $1.25. The share is now selling for $40.What is your dollar return?Dollar return = 1.25 + (40 – 35) = $6.25What is your percentage return?Dividend yield = 1.25 / 35 = 3.57%Capital gains yield = (40 – 35) / 35 = 14.29%Total percentage return = 3.57 + 14.29 = 17.86%6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Importance of Financial MarketsFinancial markets allow companies, governments and individuals to increase their utilitySavers have the ability to invest in financial assets so that they can defer consumption and earn a return to compensate them for doing soBorrowers have better access to the capital that is available so that they can invest in productive assetsFinancial markets also provide us with information about the returns that are required for various levels of risk7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 10.48Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerYear-to-Year Total ReturnsAll Ordinaries Index9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerYear-to-Year Total Returns10-Year Government Bonds10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerYear-to-Year Total ReturnsCash11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerAverage ReturnsInvestmentAverage ReturnAll Ordinaries index14.4%10 Year Government Bonds10.6%Cash8.4%Inflation3.9%12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerRisk PremiumsThe “extra” return earned for taking on riskCash is considered risk-free in the short termThe risk premium is the return over and above the risk-free rate13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerHistorical Risk PremiumsShares: 14.4 – 8.4 = 6.0%10-year government bonds: 10.6 – 8.4 = 2.2%14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 10.915Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerVariance and Standard DeviationVariance and standard deviation measure the volatility of asset returnsThe greater the volatility the greater the uncertaintyHistorical variance = sum of squared deviations from the mean/(number of observations – 1)Standard deviation = square root of the variance16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample – Variance and Standard DeviationYearActual ReturnAverage ReturnDeviation from the MeanSquared Deviation1.15.105.045.0020252.09.105-.015.0002253.06.105-.045.0020254.12.105.015.000225Totals.42.00.0045Variance = .0045 / (4-1) = .0015 Standard Deviation = .0387317Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 10.1018Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 10.1119Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerEfficient Capital MarketsShare prices are in equilibrium or are “fairly” pricedIf this is true, then you should not be able to earn “abnormal” or “excess” returnsEfficient markets DO NOT imply that investors cannot earn a positive return in the stock market20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 10.1221Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerWhat Makes Markets Efficient?There are many investors out there doing researchAs new information comes to market, this information is analysed and trades are made based on this informationTherefore, prices should reflect all available public informationIf investors stop researching share prices, then the market will not be efficient22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCommon Misconceptions about EMHEfficient markets do not mean that you can not make moneyThey do mean that, on average, you will earn a return that is appropriate for the risk undertaken and there is not a bias in prices that can be exploited to earn excess returnsMarket efficiency will not protect you from wrong choices if you do not diversify you still do not want to put all your eggs in one basket23Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerStrong Form EfficiencyPrices reflect all information, including public and privateIf the market is strong form efficient, then investors could not earn abnormal returns regardless of the information they possessedEmpirical evidence indicates that markets are NOT strong form efficient and that insiders could earn abnormal returns24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerSemistrong Form EfficiencyPrices reflect all publicly available information including trading information, annual reports, press releases, etcIf the market is semistrong form efficient, then investors cannot earn abnormal returns by trading on public informationImplies that fundamental analysis will not lead to abnormal returns25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerWeak Form EfficiencyPrices reflect all past market information such as price and volumeIf the market is weak form efficient, then investors cannot earn abnormal returns by trading on market informationImplies that technical analysis will not lead to abnormal returnsEmpirical evidence indicates that markets are generally weak form efficient26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizWhich 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?27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler