<aside> 💡 Based from Coursera MOOC 2: Module 1 and Live Lecture

</aside>

Learning Objectives:

LO#1: Understand, interpret, and use the CAPM and the 3-Factor Model

LO#2: Describe dividends and capital gains

LO#3: Explain the historical seasonal pattern in stock returns

Lesson 1-1: Basics of Return and Risk

(LO#1)

Interpretation of a Regression Model

Recall

Statistical Significance (p-values)

$\alpha$

$\beta$

R-squared

Notes

• p < 0.05, significant

• Intercept/constant in the regression

• CAPM: mkt_rf

• 3-Factor: Mkt_Rf, SMB, HML

• coefficient on excess market return

• the fraction of variability of excess return explained by movements in the market

Lesson 1-2: Composition of Returns

(LO#2)

Recall

Return

Firm Payout Choice

Dividend Payout Choice in the Real World

• Tax Considerations

• Signal sent by firm to investors when commit to a stream of cash payments\

Notes

• is the change in price plus any cash payout received normalized by the beginning-of-period price

• Refer to 5-2.1 for formula

• pay out dividends or keep earnings within the firm (retained earnings)?

• third choice: use earnings to repurchase firm’s stocks

• choice should not affect firm value so investors should not care

• tax considerations for taxable investors

• Signal sent by firm to investors when commit to a stream of cash payments

• Dividends are taxed on an annual basis (like labor income and interest)

• Capital gains tax (when stock sold)

  • depends on how long stock owned before selling it
    • long-term = lower tax rate
    • short-term = higher tax rate

• Lower dividend yield = potential to lower tax liability incurred by taxable investors

• Committing to dividends may signal that a firm will not waste resources on bad projects.

• can signal that a firm has arrived and expects to be consistently profitable in the future

Seasonality in Stock Returns

(LO#3)

Recall

Seasonal Patterns in Small Stocks

Window Dressing Hypothesis

Tax-Loss Hypothesis

Primer on Fixed Income

From live session dated 8 November 2023