Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionV. Risk and Return 12. Some Lessons from
Capital Market History© The McGraw−Hill^423
Companies, 2002These averages are, of course, nominal because we haven’t worried about inflation.
Notice that the average inflation rate was 3.2 percentper year over this 75-year span.
The nominal return on U.S. Treasury bills was 3.9 percentper year. The average real re-
turn on Treasury bills was thus approximately .7 percent per year; so the real return on
T-bills has been quite low historically.
At the other extreme, small stocks had an average real return of about 17.3% 3.2
14.1%, which is relatively large. If you remember the Rule of 72 (Chapter 5), then you
know that a quick back-of-the-envelope calculation tells us that 14.1 percent real growth
doubles your buying power about every five years. Notice also that the real value of the
large-company stock portfolio increased by almost 10 percent in a typical year.Risk Premiums
Now that we have computed some average returns, it seems logical to see how they
compare with each other. One such comparison involves government-issued securities.
These are free of much of the variability we see in, for example, the stock market.394 PART FIVE Risk and Return
TABLE 12.1
(concluded)Large- Long-Term U.S. Consumer
Company Government Treasury Price
Date Stocks Bonds Bills Index
12/31/73 14.69 3.50 6.98 8.71
12/31/74 26.47 3.82 8.09 12.34
12/31/75 37.23 5.63 6.04 6.94
12/31/76 23.93 15.20 5.16 4.86
12/31/77 7.16 0.55 5.26 6.70
12/31/78 6.57 0.99 7.23 9.02
12/31/79 18.61 0.50 10.32 13.29
12/31/80 32.50 0.63 12.04 12.52
12/31/81 4.92 2.62 15.21 8.92
12/31/82 21.55 43.98 11.28 3.83
12/31/83 22.56 2.03 8.89 3.79
12/31/84 6.27 15.96 10.04 3.95
12/31/85 31.73 30.34 7.70 3.80
12/31/86 18.66 22.86 6.18 1.10
12/31/87 5.25 3.24 5.87 4.43
12/31/88 16.61 6.86 6.73 4.42
12/31/89 31.69 18.64 8.48 4.65
12/31/90 3.10 7.26 7.85 6.11
12/31/91 30.47 18.52 5.71 3.06
12/31/92 7.62 8.52 3.57 2.90
12/31/93 10.07 13.45 3.08 2.75
12/31/94 1.32 7.31 4.15 2.67
12/31/95 37.58 24.86 5.64 2.54
12/31/96 22.96 1.63 5.12 3.32
12/31/97 33.36 10.89 5.22 1.70
12/31/98 28.58 13.44 5.06 1.61
12/31/99 21.04 7.12 4.85 2.68
12/29/00 9.10 17.53 6.09 3.39
Source: Data from Global Financial Data, reprinted with permission.