Investment Management

Dosen: Sahang Sapta AS., S.Sos., M.Si

Risk – Return
Measuring Risk and Return
Risk-Return
Risk-Return Concept
Probability
Variance and Standard Deviation
Risk-Return
Defining and measuring risk
Expected rate of return
Portfolio risk and capital asset pricing
model
The relationship between risk and return
Physical asset vs securities
Defining and measuring risk
Risk
The chance other than expected will
occur
A hazard; a peril; exposure to loss or
injury
Using probability distribution to measure
risk
Defining and measuring risk – Cont.
Probability (example)
If there is a farmer want to plant a wheat, so he
(she) must forecast the weather first, and the
forecast is as bellow;
Outcome Probability
Rain 0,40 = 40%
No Rain 0,60 = 60%
1.00 100%
Defining and measuring risk – Cont.
Probability Distribution for Martin
Products and US Electric
State of the Probability of Rate of return on stock if this state
Economy this State occurs
Occurring
Martin Product US Electric

Boom 0.2 110% 20%

Normal 0.5 22% 16%

Recession 0.3 -60% 10%

1.0
 Defining and measuring risk – Cont.
Calculation of Expected Rate of Return:
Martin Product & US Electric
State of the Probability Rate of return on stock if this state occurs
Economy of this State
Occurring
Martin Product US Electric

(1) (2) (3) (2)X(3) (5) (2)X(5)

(4) (6)
Boom 0.2 110% 22% 20% 4%

Normal 0.5 22% 11% 16% 8%

Recession 0.3 -60% -18% 10% 3%

1.0 k=15% k=15%

Expected Rate of Return
Expected Rate of Return (k)
The rate of return expected to be realized
from an investment; the mean value of the
probability distribution of possible result
 Expected Rate of Return – Cont.


Expected Rate of Return  k  Pr1 k1  Pr2 k 2  ...  Prn k n
n
  Pri ki
t 1
 Martin Products US Electric
0.6 0.6

0.5 0.5

0.4 0.4

0.3 0.3

0.2 0.2

0.1 0.1

0 0
-60 -45 -15 0 15 22 30 45 75 90 110 -20 -5 0 5 10 16 20 25

Expected Expected
Rate of Rate of
Return Return
15% 15%
Continuous vs Discrete Probability
Distribution
Continuous Probability Distribution is the
number of possible outcomes is limited or
finite
Discrete Probability Distribution is the
number of possible outcomes is unlimited
or infinite
Measuring Risk: The Standard Deviation


Deviation  ki  k
 Measuring Risk: The Standard Deviation
– continued

n 2
  
Variance      ki  k  Pri
2

t 1  
 Measuring Risk: The Standard Deviation
– continued

n 2
Standard     2   

Deviation
  ki  k  Pri
t 1  
Measuring Risk: The Standard Deviation
– continued (Example)
Use the Martin Product data to measure
risk using standard deviation!
Coefficient of Variation (CV)

Risk 
CV   
Re turn k
Risk Measurement without Probability
If we have a data of stock return from a
sub sector of an Industry, and they are:
10%, -5%, 20%, 11%, 9%, -10%, 12.5%,
14.5%, 15%, and 5%
How we could measure the risk of the
stocks?
The Return Data

Company Return
A 10%
B -5%
C 20%
D 11%
E 9%
F -10%
G 12.5%
H 14.5%
I 15%
J 5%
Total 82%
The Mean

∑ 𝑋𝑖
𝑖=1
𝑀𝑒𝑎𝑛=
𝑁
 Using Variance and Standard Deviation
to Measure Risk
n

 k  Mean 
2
i
Variance    2 t 1
N
n

 k  Mean 
2
i
Standard 2
    t 1
Deviation N
The End
Thank You