Return concepts
Overview
Individual asset returns - Expected returns -- Variance of returns
Returns
I buy a stock on 1 Jan 2001 for $70. On 31 Dec 2001, :. It pays a dividend of $3 : I sell it after receiving the dividend, for $85 We can talk about the dollar amount I made from this holding We can also talk about the percentage return I made
HPR
Definition: The dollar amount you receive at the end of the period for which you held the asset divided by the dollar amount you invested in the asset at the beginning of the period Minus 1 for the percentage Tells you how much $1 invested at the beginning turns into at the end (i.e., the dollar gain per dollar invested) HPR in the earlier example is:
Working with HPR
HPR says how much is made per $ invested So can quickly tell how many $ you make given the amount you invest Example: AMZN's HPR for 2012 (i.e., from Jan 2012 to Dec 2012) was 15ft. How much would I have at the end of 2012 if I invested the following amounts at the beginning of 2012: . $200? . $1000?
When would you use returns rather than dollars to compare investments?
Stock
Price on 1ti1ti01
Price on 1ti1ti02
$made by $made by Return from Return from buying one buying ten buying one buying ten share shares share shares
AMZN
20
25
5
GOOG
2
3
1
When the initial investment can be scaled up or down, it's better to use returns Example: which stock would you prefer to have bought? Neither paid dividends Return measures don't change with the amount invested (naturally: it's profit per dollar i