Investments, tenth edition

  

  1926–1968  

  1969–2012  

 Correlation with nominal T-bill rate 

  2 0.03 

    0.48 

 Correlation with real T-bill rate 

  2 0.98  

 2 0.67 

2

15

2

10

2

5

0

Percentage Points

5

10

15

20

T-Bills

Inflation

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

Figure 5.3 

Interest and inflation rates, 1926–2012

8

 Examination of  Figure 5.3  suggests the correlation in very recent years has fallen off due to the active interven-

tion of the Federal Reserve following the financial crisis. 

   Holding-Period Returns 

 You are considering investing in a stock-index fund. The fund currently sells for $100 per share. 

With an investment horizon of 1 year, the realized rate of return on your investment will depend 

on ( a ) the price per share at year’s end and ( b ) the cash dividends you will collect over the year. 

    5.4 

Risk and Risk Premiums 

bod61671_ch05_117-167.indd   127

bod61671_ch05_117-167.indd   127

6/18/13   8:03 PM

6/18/13   8:03 PM

Final PDF to printer

---

128

P A R T   I I

  Portfolio Theory and Practice

 Suppose the price per share at year’s end is $110 and cash dividends over the year 

amount to $4. The realized return, called the  holding-period return,  HPR (in this case, the 

holding period is 1 year), is defined as   

HPR 5

Ending price of a share 2 Beginning price 1 Cash dividend

Beginning price

 

 (5.10)   

 Here  we  have   

HPR 5

$110 2 $100 1 $4

$100

5 .14, or 14%   

 This definition of the HPR treats the dividend as paid at the end of the holding period. 

When dividends are received earlier, the HPR ignores reinvestment income between the 

receipt of the payment and the end of the holding period. The percent return from dividends 

is called the    dividend  yield,    and so dividend yield plus the rate of capital gains equals HPR.