McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

CHAPTER

9 Risk and ReturnLessons from

Market History

Slide 2

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin

Dollar Return = Dividend + Change in Market Value

Returns

yield gains capitalyield dividend

uemarket val beginning

uemarket valin change dividend

uemarket val beginning

returndollar return percentage

Slide 3

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin

Historical Returns, 1926-2004

Source: © Stocks, Bonds, Bills, and Inflation 2006 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.

Average Standard

Series Annual Return Deviation 　　Risk Premium Large Company Stocks12.3% 20.2% 8.5%

Small Company Stocks 17.4 32.9 13.6%

Long-Term Corporate Bonds 6.2 8.5 2.4%

Long-Term Government Bonds 5.8 9.2 2.0%

U.S. Treasury Bills 3.8 3.1

Inflation 3.1 4.3

Slide 4

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin

The Risk-Return Tradeoff

2%

4%

6%

8%

10%

12%

14%

16%

18%

0% 5% 10% 15% 20% 25% 30% 35%

Annual Return Standard Deviation

Ann

ual R

etur

n A

vera

ge

T-Bonds

T-Bills

Large-Company Stocks

Small-Company Stocks