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Risk Return Concept
Risk Return Concept
Risk Return Concept
Dr. G.SAHOO
“The best way to forecast the future is to
invent it !”
- George Bernard Shaw, Man and Superman
INVESTMENT
It is a commitment of fund
made in the expectation of
some positive rate of return.
Characteristics of Investment
Return
Risk
Safety
Liquidity
Objective of Investment
Maximization
of return
Minimization
of risk
Hedge against
inflation
RISK
Systematic Risk
Unsystematic Risk
Systematic Risks
Risk
due to
War like inflation Interest
situation rate risk
International
Political
events risk
Industrial Market
growth risk
Risk due to
govt.
monsoon policies
scams Natural
calamities
Non – Systematic Risks
Business
risks
Non
Financial
Disputes systematic
risks risks
Risks due
to
uncertainty
Systematic Risk:
Market risk
Interest rate risk
Purchasing power risk
Regulation risk.
International risk.
Un-Systematic Risk:
Operational risk
Liquidity risk
Financial risk
Business risk
Default risk
Types of Risks in Investment
Behavioral aspect
▪ Range/Sensitivity Analysis
▪ Probability Distribution
Quantitative/Statistical aspect
▪ Standard deviation
▪ Co-efficient of variation
❑What is Return?
Income received on an investment plus any change in market price,
usually expressed as a percent of the beginning market price of the
investment
❑Components of Return
Total Return
19
Risk & Return Analysis
Components of Return
▪ Yield
The most common form of return for investors is the
periodic cash flows (income) on the investment, either
interest from bonds or dividends from stocks.
▪ Capital Gain
The appreciation (or depreciation) in the price of the
asset, commonly called the Capital Gain (Loss).
❑Components of Return Analysis
21
Risk & Return Analysis
Total Return
where,
TR = Total Return
Dt = cash dividend at the end of the
time period t
Pt = price of stock at time period t
Pt-1 = price of stock at time period t-1
Ali purchased a stock for Rs. 6,000. At
the end of the year the stock is worth Rs.
7,500. Ali was paid dividends of Rs. 260.
Calculate the total return received by Ali.
Solution
E ( R ) = X* P(X)
Solution: