Sunday, November 22, 2009


Historical Capital Market Returns

What rates of returns on shares and other financial instructions have investors earned? You can use indicates for the share prices and other securities for this purpose. We present year by year rates of return for the following financial instruments,
  1. Ordinary shares.
  2. Long term government bonds.
  3. Call money market (This is a portfolio of inter bank transaction).
  4. Treasury bills.
We can summarize the historical capital market returns by two numbers; the average return and the standard deviation. As we have discussed earlier standard deviation summarizes variability and it is a measure of total risk.
Historical risk premium
We can compare the high risk average return on the stock market with the low risk average returns on the government securities. The risk free government security is treasury bills. It is free from risk of default and the variability on its returns is the lowest. This excess return is a compensation for the higher risk of the return on the stock market it is commonly referred to as risk premium.

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