REALIZED RETURNS

Realized returns

Realized returns

Realized returns

Components of stock realized return

However, since the 2008 return of stocks and bonds began to move in the opposite, the markets out of balance. Falling bond yields lower and lower and earnings per share continue to grow persistently. Why such a strong alliance suddenly collapsed? Obviously, the formula is invisible and unaccounted for until now the components of that Greenspan chose to keep silent alchemist. Income of the owner stock consists of two components:

The current dividend

Expected growth in the flow of dividends in the future

The dividend yield plus the nominal growth rate should be dividends bond yield plus a risk premium. The transferring the terms, the difference between dividend yield and bond yield (yield gap) is equal to the risk premium of investing in stocks minus the real rate of dividend growth minus inflation. Unlike the medieval alchemists, we are armed with a clear theory that can help us identify all the components of stock returns.

Contrast of Systematic Risk AND Unsystematic Risk

The profitability of a security is affected by two types of risk: a risk to him. They depending on the characteristics of the entity or issuer, the nature of their productive assets, management competence, is the financial soundness etc. This risk also known as "unsystematic or diversifiable" and a second risk, called "systematic or market", which depends on the individual characteristics of the title, but other factors (general economic situation) that affect the behavior of prices in the stock market (Ostrom, 2004).

This “second” risk is also called as "Do not diversify," it will not be possible to eliminate through diversification, given the correlation between the profitability of the title in question with the returns of other securities through the index, which summarizes market developments. When an investor buys securities on the stock market to reduce risk, diversification makes sense if the returns of different securities purchased are not correlated, or have varying degrees of correlation with the market index . Total risk of a portfolio is not equal to weighted average risk of portfolio

Portfolio risk, in contrary to the expected return of portfolio, portfolio risk is the weighted average of the standard deviations of the individual securities in the portfolio, this is much smaller, because you can combine values and pose a risk. The reason that you can combine actions, because when one yields rise, the other down and risk-free are combined, ...