Equity Markets & Valuation 2024 PDF

Equity Markets & Valuation FIN 2323: Section 6 Chris Perry, CFA,CFP®,RICP® September 4, 2024 Rates of Return Holding-Period Return (HPR) Rate of return over given investment period PEnding  PBeginning  DivCash HPR ...

Equity Markets & Valuation FIN 2323: Section 6 Chris Perry, CFA,CFP®,RICP® September 4, 2024 Rates of Return Holding-Period Return (HPR) Rate of return over given investment period PEnding  PBeginning  DivCash HPR  PBeginning Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Rates of Return: Example Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Assignment #1 Calculate the one year holding period return (including dividends) for your stock (8/31/23-8/31/24) (Excel) For PEP (assume quarterly dividend paid in cash at end of the holding period): HPR = $172.88-$177.92+($1.355+1.265+1.265+1.265) = 0.11 = 0.06% $177.92 $177.92 For BRK.b (has no dividend): HPR = $475.92-$360.20 = $115.72 = 32.1% $360.20 $360.20 Source: FactSet Rates of Return: Measuring over Multiple Periods Arithmetic average Sum of returns in each period divided by number of periods Geometric average Single per-period return Gives same cumulative performance as sequence of actual returns Dollar-weighted average return Internal rate of return on investment Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Rates of Return: Measuring over Multiple Periods Arithmetic average: The sum of the returns divided by the number of years. r1  r2 ...  rn rArithmetic  n 10  25  20  20  .0875 8.75% 4 Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Assignment #1 Calculate the arithmetic average return of your stock over 5 years (8/31/19-8/31/24) (Excel) Under FactSet- return analysis PEP: Return 2024+Return 2023+Return 2022+Return 2021+Return 2020 5 =-0.57+6.79+13.16+15.00+5.41= 7.96% 5 Source: FactSet Assignment #1 Arithmetic Average Return: BRK.B: Return 2024+Return 2023+Return 2022+Return 2021+Return 2020 5 =32.13+28.28-1.74+31.06+7.19= 19.38% 5 Source: FactSet  Rates of Return: Measuring over Multiple Periods Geometric average: Single period return that gives the same cumulative performance as the sequence of actual returns 1/ n rGeometric [(1  r1 ) (1  r2 ) ... (1  rn )]  1 1/4 1.10 1.25 .80 1.20   1 0.0719 7.19% Geometric Return is also called the Time Weighted Average Return Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Assignment #1 Calculate the geometric average return of your stock over 1 year, 3 years and 5 years (Excel) Steps: Download Price Data from Excel 1 Year Return for BRK.B (9/1/23-8/31/24) = 32.13% 3 Year Return for BRK.B (9/1/21-8/31/24) = 18.60% 5 Year Return for BRK.B (9/1/19-8/31/24) = 18.52% For dividend paying stocks, such as PEP, have to account for dividend Assignment #1 (from Chapter 5) Due Wednesday September 11th 12:50 PM 4.17 points Use FactSet for Calculate thedata one year holding period return (including dividends) for your stock (8/31/23-8/31/24) (Excel) Calculate the arithmetic average return of your stock over 5 years (8/31/19-8/31/24) (Excel) Calculate the geometric average return of your stock over 1 year, 3 years and 5 years (Excel) Calculate the geometric average return of the S&P 500 and the stock’s sector over 1 year, 3 years and 5 years (Excel) Instead use S&P 500 and sector ETF Annualized Returns in FactSet (under Return Analysis) Depict the stock’s 1 year, 3 year and 5 year geometric average return performance relative to the S&P 500 and stock’s sector over 1 year, 3 year and 5 years in Graph form (Include in PowerPoint slide) For non-dividend paying stocks, you should be close to FactSet returns; for dividend paying stocks use FactSet returns Provide 5 bullets why you think the stock has outperformed or underperformed the S&P 500 and stock’s sector over 3 years (Include in PowerPoint slide) Notes: Use S&P 500 data in FactSet and Sector ETF for the sector returns in FactSet Sources of Research for Assignments Edgar (for company filings especially 10-Ks and 10-Qs) Corporate website (Investor Relations especially for company presentations and research) FactSet Bloomberg (especially helpful for sell-side research reports) Rates of Return: Measuring over Multiple Periods 1/ n rGeometric [(1  r1 ) (1  r2 ) ... (1  rn )]  1 1/4 1.10 1.25 .80 1.20  1 0.0719 7.19% Calculator Steps (using HP 10bII+) 1.10*1.25*.80*1.20= 1.32 Shift (orange down arrow,3rd from bottom) yx (will see pending) Shift (orange down arrow,3rd from bottom) ( 1 4 Shift) = 1.0719 1.0719-1=.0719 *100 = 7.19% Inflation and the Real Rate of Interest Nominal interest rate is the rate at which the dollar value of your account grows Real interest rate is adjusted for inflation and is the rate at which the goods you can buy with your funds grows Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Inflation and The Real Rates of Interest Nominal Interest and Real Interest 1  rNom 1  rReal  1 i where rReal Real Interest Rate rNom  Nominal Interest Rate i Inflation Rate Example: What is the real return on an investment that earns a nominal 10% return during a period of 5% inflation? 1 .10 1  rReal  1.048 1 .05 r .048 or 4.8% Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Inflation and The Real Rate of Interest U.S. History of Interest Rates, Inflation, and Real Interest Rates Since the 1950s, nominal rates have increased roughly in tandem with inflation 1930s/1940s: Volatile inflation affects real rates of return Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Inflation and Interest rates (1927- 2022) Real rate of return on T-bills was -6.5% during COVID- 19 pandemic as supply disruptions and aggressive stimulus actions caused inflation to spike Source: Essentials of Investments, Bodie et al. McGraw Recent Barron’s Articles on Eli Lilly (LLY) Zepbound and Weight-Loss Drugs Get More Good News. It Isn’t Tim e for Eli Lilly and Novo’s Investors to Celebrate. - Barron's (barrons.com) LLY recently announced a discounted version of its GL P-1 weight loss drug Zepbound Issue whether how much insurance will pay for weigh t loss drugs LLY moving closer to $1T market cap Source: Barron’s 9/2/24 Novo Nordisk’s Ozempic Shortage Is Worsening. That’s G The Historical Record: World Portfolios World Large stocks: 24 developed countries, ~6000 stocks U.S. large stocks: Standard & Poor's 500 largest cap U.S. small stocks: Smallest 20% on NYSE, Nasdaq, and Amex World bonds: Same countries as World Large stocks Essentials of Investments, Bodie et al. McGraw Hill 2024 U.S. Treasury bonds: Barclay's Long-Term Historical Return and Risk Essentials of Investments, Bodie et al. McGraw Hill 2024 Frequency Distribution of Annual Returns on United States Treasury Bills , 1927-2022 Essentials of Investments, Bodie et al. McGraw Hill Frequency Distribution of Annual Returns on 30-Year Treasury Bonds , 1927-2022 Essentials of Investments, Bodie et al. McGraw Hill 2024 Frequency Distribution Of Annual Returns on Common Stocks, 1927- 2022 Essentials of Investments, Bodie et al. McGraw Hill 2024 Risk and Risk Premiums Scenario Analysis and Probability Distributions Scenario analysis: Possible economic scenarios; specify likelihood and Holding Period Return (HPR) Probability distribution: Possible outcomes with probabilities Expected return: Mean value Variance: Expected value of squared deviation from mean Standard deviation: Square root of variance Source: Essentials of Investments, Bodie et al. McGraw Hill 2024 Rates of Return Dollar-weighted average return The internal rate of return on an investment Annualizing Rates of Return APR = Annual Percentage Rate Per-period rate × Periods per year Ignores Compounding EAR = Effective Annual Rate Actual rate an investment grows Does not ignore compounding Source: Essentials of Investments, Bodie et al. McGraw Hill 2024