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McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

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Presentation on theme: "McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition."— Presentation transcript:

1 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-0 Corporate Finance Ross  Westerfield  Jaffe Seventh Edition 9 Chapter Nine Capital Market Theory: An Overview

2 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-1 Dollar Return = Dividend + Change in Market Value 9.1Returns

3 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-2 The Future Value of an Investment of $1 in 1925 $59.70 $17.48 Source: © Stocks, Bonds, Bills, and Inflation 2003 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. $1,775.34

4 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-3 Historical Returns, 1926-2002 Source: © Stocks, Bonds, Bills, and Inflation 2003 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. – 90%+ 90%0% Average Standard Series Annual Return DeviationDistribution Large Company Stocks12.2%20.5% Small Company Stocks16.933.2 Long-Term Corporate Bonds6.28.7 Long-Term Government Bonds5.89.4 U.S. Treasury Bills3.83.2 Inflation3.14.4

5 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-4 The Risk-Return Tradeoff

6 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-5 Rates of Return 1926-2002 Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.

7 McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 9-6 Stock Market Volatility Source: © Stocks, Bonds, Bills, and Inflation 2000 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. The volatility of stocks is not constant from year to year.

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