Risk and Return

Return
 Definition of Return: A return, also known as a financial return, in its
simplest terms, is the money made or lost on an investment over some
period of time.
 Holding Period Return
The period during which you own an investment is called its holding period, and
the return for that period is the holding period return (HPR).

If you commit $100 to an investment at the beginning of the year and you get
back $110 at the end of the year, what is your HPR for the period?
Year Beginning Value at January, 1 2021 Ending Value at December,
31 2021
2021 100 110

HPR = 110/100
HPR = 1.10
 Holding Period Yield (HPY)
 Although HPR helps us express the change in value of an
investment, investors generally evaluate returns in percentage
terms on an annual basis.
 The HPY is equal to the HPR minus 1 multiplied by 100.

HPY = (HPR – 1) * 100

HPY = Holding Period Yield
HPR = Holding Period Return
 Holding Period Yield
HPY = (HPR – 1) * 100
Or
HPY = (Ending value of investment / Beginning Value of Investment – 1) * 100

If you commit $100 to an investment at the beginning of the year 2021 and you
get back $110 at the end of the year, what is your HPY for the period?
Year Beginning Value at January, 1 2021 Ending Value at December, 31 2021
2021 100 110

HPY = (110/100 – 1) * 100

HPY = (1.10 – 1) * 100
HPY = (0.10) * 100
HPY = 10 %
 Mean or Average
 Used to know average performance over the years
 The most common type of Mean is “Arithmetic Mean”. It is also called Simple Mean
Arithmetic Mean
 The arithmetic mean is the simplest and most widely used measure of a mean, or
average.
 It simply involves taking the sum of a group of numbers, then dividing that sum by the
count of the numbers used in the series.
 Mean or Average
Arithmetic Mean

Number of
Years or
Number of
Mean Summation Periods
Sign

Yearly Yield Value or Specific Period Yield Value

x =(Ending value of investment / Beginning Value of Investment – 1)
Mean or Average
Arithmetic Mean
Mean or Average

Arithmetic Mean
Mean or Average

Arithmetic Mean
 Mean or Average

0.20

Yield = (Ending value / Beginning Value) -1

Year 2019 Yield = (120/100) -1
Yield = 1.2 -1
Yield = 0.20
 Mean or Average

0.20

Yield = (Ending value / Beginning Value) -1

Year 2020 Yield = (170/120) -1
Yield = 1.42 -1
Yield = 0.41
 Mean or Average

0.20

-0.12

Yield = (Ending value / Beginning Value) -1

Year 2021 Yield = (150/170) -1
Yield = 0.88 -1
Yield = -0.12
Mean
n = number of years of which yield is calculated
n=3
= Σ(X)/n
= 0.49/3
= 0.16
Mean
= Σ(X)/n Interpretation = The average yield of
= 0.49/3 “Alpha Corporation” from year 2019 to
2021 is 0.16 or 16 percent
= 0.16
 Risk
 Risk can be defined as the chance that some unfavorable event will occur.
 Risk is defined in financial terms as the chance that an outcome or
investment's actual returns will differ from an expected outcome or return.
 Risk includes the possibility of losing some or all of an original investment
 Risk is the uncertainty that an investment will earn its expected rate of
return.
 There are two major ways to measures of risk:
 Variance
 Standard deviation
17
 Risk Related to Historical/Past Return
Variance
 The variance is the average of the squared differences from the mean.
 To figure out the variance, first calculate the difference between each point and
the mean; then, square and average the results.

Number of
Summation
Years or
Sign Yearly Yield
Number of
Value or Specific
Mean Periods
Period Yield
Value
19
 20

Σ=?
n=3
 21

0.04 0.0016

= 0.20 – 0.16 = (0.04)2

Year 2019 = 0.04 = 0.0016
 22

0.04 0.0016
0.25 0.0625

= 0.41 – 0.16 = (0.25)2

Year 2020 = 0.25 = 0.0625
 23

0.04 0.0016
0.25 0.0625
-0.28 0.0786

= -0.12 – 0.16 = (-0.28)2

Year 2021 = -0.28 = 0.0786
24
 25

Σn
Σ = 0.1427 = 0.1427/3
n=3 = 0.0475
 26

Σn
Σ = 0.1427 = 0.1427/3
n=3 = 0.0475

Interpretation of Variance = In terms of variance, the risk related to yield of

“Alpha Corporation” is 0.0475
 Standard Deviation
27
 There are two major ways to measures of risk:
 Variance
 Standard deviation
In finance, standard deviation is a commonly used measure to calculate risk.
To calculate, it is simply the under root of variance
Standard deviation is a statistic that measures the dispersion of a dataset
from its mean and is calculated as the square root of the variance.
 Risk
Standard Deviation

Under root of
Variance
 29

Variance Standard Deviation

Σn
Σn
0.0475
0.1427/3 0.2179
0.0475 21.79%
 30

Variance Standard Deviation

Σn
Σn
0.0475
0.1427/3 0.2179
0.0475 21.79%
 Additional Measure of Risk 31
Co-efficient of Variation (CV)

 Theco-efficient of variation represents the ratio of the standard

deviation to the mean, and it is a useful statistic for comparing the
degree of variation from one data series to another
 Additional Measure of Risk 32
Co-efficient of Variation (CV)

CV = /
CV = Co-efficient of Variation (CV)
= Standard Deviation
= Mean
 33

Mean Standard Deviation

0.16 21.79% 0.2179
Co-efficient of Variation (CV)
CV =
 Mean Standard Deviation
0.16 21.79% 0.2179

Co-efficient of Variation (CV)

CV = /
CV = 0.2179/0.16
CV = 1.36
 Mean Standard Deviation
0.16 21.79% 0.2179

Co-efficient of Variation (CV)

CV = /
CV = 0.2179/0.16
CV = 1.36
Interpretation: The ratio of standard deviation to mean of
Alpha Corporation is 1.36