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    Bundelkhand University: Institute of Economics & Finance, Jhansi Presentation ON Risk & Return

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    Anuj Shukla
    The document provides information about risk and return. It defines risk as the possibility of loss and outlines different types of risk including systematic, unsystematic, market, interest rate, and credit risk. It also defines return as the total income received from an investment in terms of dividends and capital gains or losses. The document discusses the positive relationship between risk and return, where a higher level of risk is generally required to achieve a higher expected return. It also provides examples of calculating expected return, risk, and the risk and return of portfolios using the Markowitz and CAPM models.

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    Bundelkhand University: Institute of Economics & Finance, Jhansi Presentation ON Risk & Return

    Uploaded by

    Anuj Shukla
    12 views19 pages
    The document provides information about risk and return. It defines risk as the possibility of loss and outlines different types of risk including systematic, unsystematic, market, interest rate, and credit risk. It also defines return as the total income received from an investment in terms of dividends and capital gains or losses. The document discusses the positive relationship between risk and return, where a higher level of risk is generally required to achieve a higher expected return. It also provides examples of calculating expected return, risk, and the risk and return of portfolios using the Markowitz and CAPM models.

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    The document provides information about risk and return. It defines risk as the possibility of loss and outlines different types of risk including systematic, unsystematic, market, interest rate, and credit risk. It also defines return as the total income received from an investment in terms of dividends and capital gains or losses. The document discusses the positive relationship between risk and return, where a higher level of risk is generally required to achieve a higher expected return. It also provides examples of calculating expected return, risk, and the risk and return of portfolios using the Markowitz and CAPM models.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    12 views19 pages

    Bundelkhand University: Institute of Economics & Finance, Jhansi Presentation ON Risk & Return

    Uploaded by

    Anuj Shukla
    The document provides information about risk and return. It defines risk as the possibility of loss and outlines different types of risk including systematic, unsystematic, market, interest rate, and credit risk. It also defines return as the total income received from an investment in terms of dividends and capital gains or losses. The document discusses the positive relationship between risk and return, where a higher level of risk is generally required to achieve a higher expected return. It also provides examples of calculating expected return, risk, and the risk and return of portfolios using the Markowitz and CAPM models.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 19

    BUNDELKHAND

    UNIVERSITY
    INSTITUTE OF ECONOMICS & FINANCE, JHANSI

    PRESENTATION
    ON
    RISK & RETURN

    SUBIMITTED TO SUBIMITTED BY
    MIS RADIKA CHAUDHARY ANJALI SHUKLA
    (LECTRUR) MBA( FM) 3RD SEM
    ROLL NO. 6
    RISK

    Risk is the possibility of the loss injuring. Risk means loss, uncertainty of return, uncertainty of required rate of return or variability of return 0r risk is also known as standard deviation & mathematically represented as σ
    Risk
     Systematic risk  Unsystematic risk

     Market risk  Business Risk


     Interest rate Risk  Financial Risk
     Default Risk/ Credit
     Purchasing Risk
    Power Risk
    Systematic Risk: - The risk which are
    not controllable.

    Unsystematic risk:-The risk which


    are controllable.
    Comparision of Business Risk
     Fluctuation in sale  Social
     Fixed cost  Legal
     Single product  Technical
     Research &  Environmental
    Development  political
     Management

    Business Risk Internal Business Risk External


    Risk Risk

    Systematic Risk unsystematic


    Risk

    No. of the securities No. of the securities


     Return Component
     Periodic cash
    Return receipts( internet/
    dividend)
     Capital
    gain/loss(change in
    the price of the
    The total income assets)
    received during
    the holding
    period
    Calculation of the total return
     Total return= D/P0 + (P1 – P0 )/P0
     Where
     D- Dividend /Income
     P1- price at the end of the year
     P0 – price at the beginning of the year
     D/P0- represented dividend yield
     (P1- P0)/P0- represented capital gain/loss
    Q- The share price of the health care on Feb. 20 th
    2009 was Rs. 401 & price on oct 26 th 2010 was
    Rs. 480 .dividend received was Rs. 35 then the
    rate of return be calculated is as follows?

     Rate of return = D/ P0 + (P1- P0 )/P0


    = 35/401 + (480 – 401 )/401
    = 0.2842
    = 28.42%
    RISK AND RETURN RELATIONSHIP
    There is positive relationship amount of the risk
    assume & amount of the expected return if grater
    the risk larger the excepted return & larger chances
    of the loss.
    Risk premium Market line
    = (Rm – Rf ) Equity share
    Preference share
    Fixed deposit of the company
    Unsecured loan
    Debenture
    Mortgage loan
    Government security
    Rf

    Risk (σ)
    Risk & Return on single assets in simple term
    Q-The rate of return of the equity share of the Tata motors Ltd. For the
    past 6 years are as follows.
    Year 2003 2004 2005 2006 2007 2008
    Rate of return 12 18 -6 20 22 24

    Calculate the excepted return and risk?


    Sol. Calculation of the excepted return
    ER = ( R1 + R2 +-------+ Rn )/ n
    = (12+18-6+20+22+24)/6
    = 15%
    Calculation of the risk
    Risk (σ) = √(∑(R - R )2/ n or = √(∑(R - R )2*Pi ( when the probability be given)

    R 12 18 -6 20 22 24
    R 15 15 15 15 15 15
    (R- R) -3 -3 -21 5 7 9
    (R- R)2 9 9 441 25 49 81
    Risk (σ) = √614/6 = 10.12%
    There are some theories are represented
    the relationship of risk and return
     Selection of the securities according to
    the Markowitz model
     Selection of the securities according to
    the Sharpe index model
     Calculation of the risk and return on the
    basis of the arbitrage pricing model.
     Calculation of the risk and return of on
    the basis of the capital assets pricing
    model
    Calculate the rate of return when 100% invested in
    securities X & when 100% invested on the security Y &
    what is the rate of the return when we divided X & Y in
    the ratio which are as follows which represented our
    portfolio
    X:Y =50:50, X:Y=80:20 and X:Y= 20:80 calculated it ?

    State of Probabilit Return of security Return of the


    economy y X securities Y
    A .1 -8 14
    B .2 10 -4
    C .4 8 6
    D .2 5 15
    E .1 -4 20
    Based on Markowitz model-
    Calculation is as follows
    State of Pi RX RY (ER)x=(RX * (ER)Y=(RY * RXY = (RX * Pi) RXY *Pi
    econom Pi ) Pi ) +(RY * Pi)
    y
    A .1 -8 14 -.8 1.4 3 0.3
    B .2 10 -4 2 -.8 3 0.6
    C .4 8 6 3.2 2.4 7 2.8
    D .2 5 15 1 3.0 10 2.0
    E .1 -4 20 -.4 2.0 8 0.8
    TOTAL ∑(ER)x= 5 ∑(ER)y= 8 ∑RXY
    =6.5
    Conclusion

     When we invested Security investment


    X:Y=80:20 Return
    RXY = W((ER)x + (1- W) (ER)Y
    W= .20 & (1-W)=.80 X 100% 5%
    RXY = (.20*5) + Y 100% 8%
    (.80*8)=7.4% X:Y 50:50%
    6.5%
     When we invested
    X:Y=20:80
    X:Y 80:20%
    RXY = W((ER)x + (1- W) (ER)Y 5.6%
    W= .80 & (1-W)=.20 X:Y 20:80% 7.4%
    RXY = (.80*5) + By the diversification we
    (.20*8)=5.6% get different return
    Calculate the risk of the given security A & B
    after this calculate portfolio AB risk and also
    calculate the rate of return and compare between
    them?

    State of Probab Return of Return of the Return on the


    economy ility security A securities B port folio AB
    A .2 15 -5 5
    B .2 35 5 20
    C .2 -5 15 5
    D .2 25 35 30
    E .2 5 25 15
    Solution of the risk and return
    SOE Pi RA R (ER)A=(RA* (ER)B=(RB * Portfolio EAB =RAB*Pi
    B Pi) P i) return

    A .2 15 -5 3 -1 5 1
    B .2 35 5 7 1 20 4
    C .2 -5 1 -1 3 5 1
    5
    D .2 25 3 5 7 30 6
    5
    E .2 5 2 1 5 15 3
    5
    TOT ∑(ER)A=15 ∑(ER)B=15 ∑EAB=15
    AL
    Conclusion
     Risk for A  Security risk return
    (σA)2 =.2*(15-15)2+.2*(35-15)2+.2*(-5-  A 14.14% 15
    15)2+.2*(25-15)2+.2*(5-15)2
     B 14.14% 15
    = 200
     AB 9.49% 15
    σA = √(200) =14.14 %
     Risk for B We can say that if we are
    (σB)2 =.2*(-5-15)2+.2*(5-15)2+.2*(15- investing in the single
    15)2+.2*(35-15)2+.2*(25-15)2 security return be same but
    = 200 risk also same if we
    σB = √(200) =14.14 % diversified our portfolio
     Risk for AB there are no any changes
    (σAB)2 =.2*(5-15)2+.2*(20-15)2+.2*(5- occurred in the return of the
    15)2+.2*(30-15)2+.2*(15-15)2 security but risk be reduced
    = 90 in the comparison of the
    σB = √(90) =9.49 % single investment
    conclusion
     It is necessary to keep in mind the risk
    return trade off because if you do not
    keep in mind than you bear loss. Before
    investing in the securities you have keep
    in mind how much risk is involved and
    what is the excepted return be come from
    there investment. the combination of the
    risk and return can not be ignored but can
    be reduced by the proper management
    by the various method

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