Subject 5. Risk and Return Characteristics of Equity Securities

Return Characteristics

There are two main sources of equity securities' total return:

  • Capital gains/losses are the difference between the net sales price of a stock and its net cost.
  • Dividends are the portion of the firm's earnings paid to common and preferred shareholders.

Investors who purchase non-domestic equities may incur foreign exchange gains or losses.

Reinvestment income of dividends is also a source of return.

Risk Characteristics

The risk of an equity security is the uncertainty of its expected total return. The measurement of the risk is typically the standard deviation of its expected total return over a number of periods.

Analysts use different methods to estimate an equity's expected return and risk.

Different types of shares have different risk characteristics. Common shares are more risky than preferred shares. Some shares (e.g., callable) are more risky than other shares (e.g., putable).

User Contributed Comments 3

You need to log in first to add your comment.
janglejuic: Pretty straightforward
CFAToad: I was wondering if callable have more risk or just a ceiling on gains. But if you consider tge liquiduty risk once the ceiling is breached, it makes sense. No one would buy a callable share when it trades above the threshold. So if the corporation does mot call the share, the shareholder might be stuck with the share, or at least have fewer buyers.
johare30: please ask me these questions on the exam