Two Sides of

RISK & RETURN the Investment

coin
 Risk
Risk is the possibility that the actual outcome of an investment will differ
from the expected outcome.
Risk can be measure by Variance and Standard deviation
There are 3 Source of Risk
1. Business Risk – A risk that associated with performance of firm,
for eg. Competition in market
2. Interest Rate Risk - Change in interest rate affects investment.
for eg. If interest rate goes up, the market price of existing fixed income
securities
fall and vise a versa.
3. Market Risk – It is a risk associated with the economy wide factors
for eg. Decrease in Growth rate of GDP, Demonetization
 Types of Risk

Total Risk = Unique Risk+ Market Risk

1. Unique Risk – This risk is from firm-specific factors, Known as
Diversifiable risk and Un-systematic Risk, for eg. Investor can
change the company or industry
2. Market Risk – Known as Non- Diversifiable risk and Systematic
Risk, for eg. Downward Economic condition

Risk can be measure by Variance and Standard deviation

 Y Market risk vs. Unique risk

Level
of
Risk

Unique Risk

Market Risk
X

0 5 10 15 20 25
No. of Securities
 Return
Return means a primary motivating force that drives the investment.
Return is a reward for undertaking an investment
In other words it is reason for investment
Varies with the investment option
It may depend upon the investment option, duration and many other
factors
 Types of Return
There are 2 Types of return namely, Current Return and capital
return
Current return means periodic return such as interest,
dividend etc.
Capital return means gain in present value of investment (It
may
Total be a saving
Return of tax)
= Cash Payment received during the Period+Price Change over the Period
Price of the Investment at the Beginning
Total Return = Capital Return+ Current Return
 
𝑅 =¿ ¿
 Here, R is total return over a period of time, C is cash payment received during the
period, is Ending Price and, PB is Beginning Price
 Tell return for each
instrument
1. Bank FD
2. Gold
3. Land
4. House
5. NSE
6. Shares
7. PPF
8. PF
9. Post office deposits
10. Corporate FD
 Example
Mr. Mehul has purchased one Stock of TCS in the beginning of year
2017 at price of 70 Rs. After year he got 10.5 RS. as dividend and
Price end of year was Rs. 75. What percentage total return Mr. Mehul
has earned on stock of TCS?
=Rs. 10.5+ (Rs.75-Rs.70)

Rs. 10.5 =15% Rs. 70 Rs. 5

= 7.14%

Rs. 70 Rs. 70

Rs. 15.5
= 22.14%
 Continue…
 Return relative means 1+total return in decimals, in Our example, 1.2214
Cumulative Wealth Index is a return measure that reflects the changes in
the level of wealth
Arithmetic mean shows average return
Geometric mean shows the average compound rate of growth that actually
occur over multiple period
Expected return means a return that occurs with investment in multiple
securities with different portion of investment and amount at same period
of time
Real Return means a return in relation to inflation
THANK YOU