Understanding the returns from investing When buying stock, you can expect to earn money through future current income (from____________________________     ) and future capital appreciation (from_______________________________     ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Understanding the returns from investing
When buying stock, you can expect to earn money through future current income (from____________________________     ) and future capital appreciation (from_______________________________     ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options.
 
Understanding the Approximate Yield Equation
The formula for the approximate yield of an investment can look intimidating, but it’s really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table.
 
Stock 1
Stock 2
Expected average annual dividends (2012–2014) $1.00 $2.70
Current stock price $55 $117
Expected future stock price (2014) $67 $147
Average current income (CI) $
________________________
$
_____________________
Average capital gains (CG) $
________________________
$
_____________________
Average value of the investment (VI) $
________________________
$
_____________________
 
Next, derive the correct formula for approximate yield by correctly arranging these three variables in the equation that follows.
 
Approximate Yield = _________________/____________________
 
Using this formula, you can see that the approximate yield for Stock 1 is  _________________________  and the approximate yield for Stock 2 is _________________________   .
 
True or False: For these investments to be equally attractive, Stock 2 must carry lower risk than Stock 1.
 
False_______________
True________________
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