The Financial Times Guide to Understanding Finance, 2nd Edition

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Returns I: Basic concepts

• Simple returns
• Continuously compounded returns
• Multiperiod returns
• The big picture
• Excel section

We’ll start easy, with a few concepts, definitions, and notation that we’ll use throughout the book. In this first chapter we’ll discuss simple returns, continuously compounded returns, and multi-period returns, along with a few other things. We’re just going to warm-up.

Simple returns

Table 1.1 shows the year-end stock price (p) of Coca-Cola between 2000 and 2009, and the annual dividend per share (D) paid by the company in each of those years. Suppose we had bought a share of Coca-Cola at the end of 2008 and sold it at the end of 2009; what would have been our one-year return?

table 1.1

That’s easy. We bought ...