Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

V. Risk and Return 12. Some Lessons from

Capital Market History

(^430) © The McGraw−Hill
Companies, 2002
CHAPTER 12 Some Lessons from Capital Market History 401

FIGURE 12.10

Series

Large-company stocks

Small-company stocks

Long-term corporate bonds

Long-term government

U.S. Treasury bills

Inflation

Intermediate-term government

Standard

Deviation

20.2

33.4

8.7

9.4

5.8

3.2

4.4

%

• 90% 0% 90%

Average Distribution

Annual

Return

13.0%

17.3

6.0

5.7

5.5

3.9

3.2

*

*The 1933 small-company stocks total return was 142.9 percent.

Source: © Stocks, Bonds, Bills, and Inflation 2001 Yearbook™, Ibbotson Associates, Inc., Chicago (annually updates work by

Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved.

Historical Returns, Standard Deviations, and Frequency Distributions: 1926–2000

FIGURE 12.11

Return on

large-company

stocks

Probability

–3 –2 –1 0 +1 +2 +3

95%

99%

68%

• 47.6% – 27.4% –7.2% 13% 33.2% 53.4% 73.6%

The Normal Distribution.

Illustrated returns are based on the historical return and standard deviation

for a portfolio of large-firm common stocks.