Principles of Finance · free preview
A Century of Stock Returns
Stocks have returned more than any major asset class across the century, roughly 10 percent annually with dividends reinvested, but the average hides violent swings including crashes and lost decades, and the reward for bearing that risk is the equity risk premium.
1. The headline average
The headline average
2. The violence under the average
The violence under the average
3. The equity risk premium
The equity risk premium
4. Lessons for the long-term investor
Lessons for the long-term investor
5. The century's best asset
Which asset class delivered the highest long-run US returns across the century?
6. Decomposing the 10 percent
How has the historical roughly 10 percent stock return typically decomposed?
7. The crash record
Which statement accurately reflects the historical pattern of stock market crashes?
8. Why the premium exists
Why have stocks historically delivered a premium over risk-free bills and bonds?
9. The investor's behavior gap
What does the historical record show about typical investors' returns versus the index's returns?
10. Why time helps
Why does a longer investment horizon narrow the range of likely stock outcomes?
11. The premium's size
Historically, stocks beat risk-free bills by roughly how many percentage points annually, the equity risk premium? Write the number.
12. The worst episode
What year names the crash that began the Great Depression, erasing nearly ninety percent of the market by its bottom? Write the year.
13. The gap's name
What two-word term names the difference between the index's return and the return investors actually capture through their timing decisions? Answer in lowercase.
14. The two word lesson
What two-word phrase, the opening theme of this course, does the century's stock record ultimately validate? Answer in lowercase.
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