Introduction to Corporate Finance

PART 2: VAlUATION, RISK AND RETURN

FIGURE 6.3B THE REAL VALUE OF $1 INVESTED IN AUSTRALIAN SHARES, AUSTRALIAN TREASURY BONDS AND

AUSTRALIAN NOTES, 1900–2014

The figure shows that $1 invested in Australian ordinary shares in 1900 would have grown to a real value of $3,441 by

2014. By comparison, a $1 investment in Australian Treasury bonds or notes would have grown to just $6.80 or $2.20,
      respectively, by 2014.

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

3,441

6.8

2.2

0

1

10

100

1,000

10,000

Equities

Bonds

Bills

Source: Credit Suisse Global Investment Returns Yearbook 2015, by Elroy Dimson, Paul Marsh, and Mike Staunton, Page 36.

Published by Credit Suisse Research Institute, February 2015. Reprinted with permission.

TABlE 6.1A PERCENTAGE RETURNS ON US BILLS, US BONDS AND US STOCKS, 1900–2010

Stocks earn the highest average returns (measured using an arithmetic mean), but they fluctuate over a wide range. Treasury bill returns move

within a fairly narrow range, but T-bills earn low average returns. Treasury bonds fall between stocks and bills along both dimensions.

Nominal (%) Real (%)

Asset class Average Best year Worst year Average Best year Worst year

US bills 3.9 14.7 0.0 1.0 19.7 –15.1

US bonds 5.6 40.4 –9.2 2.4 35.1 –19.4

US stocks 11.4 57.6 –43.9 8.3 56.3 (1933) –37.6 (1931)

Source: Elroy Dimson, Paul Marsh and Mike Staunton, ‘Triumph of the Optimists,’ Global Investment Returns Yearbook 2010. ABN AMRO, London. Updates provided by Dimson,

et al. to 2009. Author’s estimates for 2010. Reprinted with permission; Dimson, Marsh & Staunton: Equity Risk Premia Around the World, London Business School, July 2011

TABlE 6.1B REAL RETURNS ON AUSTRALIAN SHARES, 1900–2010

Over the same time period, Australian shares outperformed US stocks, but they also suffered from widely fluctuating

returns. The best and worst annual performances for Australian shares were lower than those for US stocks. However, it is

interesting to note that these extreme values occurred during very different timeframes for both markets.

Real (%)

Asset class Average (arithmetic mean) Best year Worst year

Australian ordinary shares 9.1 51.5 (1983) –42.5 (2008)

Source: Dimson, Marsh & Staunton, Equity Risk Premia Around the World, London Business School, July 2011, p.18.

Figure 6.4 shows the nominal return for each of the three asset classes in every year from 1900 to

2010. The wider range of outcomes on stocks relative to Treasury bonds, and likewise on bonds relative
      to bills, is readily apparent. But so is the tendency for stocks to earn higher average returns than T-bonds
      and for T-bonds to outperform T-bills. A few recent years are highlighted for comparison. For example,
      in 2010, returns on Treasury bills were at historically low levels, barely above 0%. Notice also that in
      2008, stocks endured one of their worst years ever, while bond returns were unusually high that year.