CP

Actual Stock Prices and Returns 211

down.^18 We know from theory that expected returns, as estimated by a marginal

investor, are always positive, but in some years, as Figure 5-6 shows, actual returns are

negative. Of course, even in bad years some individual companies do well, so “the name

of the game” in security analysis is to pick the winners. Financial managers attempt to

take actions that will put their companies into the winners’ column, but they don’t

(^18) If we constructed graphs like Figures 5-5 and 5-6 for individual stocks rather than for a large portfolio, far
greater variability would be shown. Also, if we constructed a graph like Figure 5-6 for bonds, it would have
the same general shape, but the bars would be smaller, indicating that gains and losses on bonds are gener-
ally smaller than those on stocks. Above-average bond returns occur in years when interest rates decline,
and losses occur when interest rates rise sharply.
FIGURE 5-5 S&P 500 Index, 1967–2001
Source:Data taken from various issues of The Wall Street Journal,“Stock Market Data Bank” section.
500
400
300
200
100
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Years
700
600
800
1,000
900
1,200
1,400
1,500
1,300
1,100

Stocks and Their Valuation 207