Financial Management: Core Concepts, Third Edition

8.3 Historical Returns

Does market history reveal any insights about different investment choices and their risk over time? In Chapter 5, we looked at returns for Treasury bills and Treasury bonds. We now look at some of the historical rates for these two investment types and add large-cap and small-cap stocks. “Cap” refers to a company’s capitalization: it is the price of the company stock times the outstanding shares—in other words, the company’s net worth. Large-cap stocks are stocks that have a net worth of more than $5 billion. Small-cap stocks are stocks that have a net worth of less than $1 billion. Table 8.1 displays annual returns for three-month U.S. Treasury bills, long-term government bonds, large-cap stocks, and small-cap stocks ...