2. MEANING
A probability or threat of damage, injury,
liability, loss, or any other negative occurrence
that is caused by external or internal reason ,
and that may be avoided through preventative
action.
3. TYPES OF RISK
Systematic Risk - Systematic risk influences a
large number of assets. A significant political
event, for example, could affect several of the
assets in your portfolio. It is virtually impossible
to protect yourself against this type of risk.
Unsystematic Risk - Unsystematic risk is
sometimes referred to as "specific risk". This
kind of risk affects a very small number of
assets. An example is news that affects a
specific stock such as a sudden strike by
4. Credit or Default Risk - Credit risk is the risk
that a company or individual will be unable to
pay the contractual interest or principal on its
debt obligations.
Country Risk - Country risk refers to the risk
that a country won't be able to honor its
financial commitments.
5. Foreign-Exchange Risk - When investing in
foreign countries you must consider the fact
that currency exchange rates can change the
price of the asset as well.
Interest Rate Risk - Interest rate risk is the risk
that an investment's value will change as a
result of a change in interest rates.
6. Political Risk - Political risk represents the
financial risk that a country's government will
suddenly change its policies.
Market Risk - This is the most familiar of all
risks. Also referred to as volatility, market risk
is the day-to-day fluctuations in a stock's price.
7. RETURN :
A return is the gain or loss of a security in a
particular period. The return consists of the
income and the capital gains relative on an
investment, and it is usually quoted as a
percentage.
8. TYPES:
Return on Investment: is calculated by dividing
the cost of the investment by the difference
between the cost of the investment and the
gain on the investment.
Return on Equity : Return on equity, or ROE, is
another commonly used measure of return used
by those analyzing business performance. In
this case, a company’s net income is the gain or
loss, and the cost is the average of the
company’s equity. ROE is used by investors
looking for a return on the company's equity
9. Return on Assets: It is commonly used as a
measure of return by those analyzing financial
stocks
11. PROFIT
Profit = TR – TC
The reward for enterprise
Profits help in the process of directing resources to alternative uses in
free markets
Relating price to costs helps a firm to assess profitability in
production
12. PROFIT
Normal Profit – the minimum amount required to keep
a firm in its current line of production
Abnormal or Supernormal profit – profit made over and
above normal profit
Abnormal profit may exist in situations where firms
have market power
Abnormal profits may indicate the existence of
welfare losses
Could be taxed away without altering resource
allocation
13. PROFIT
Sub-normal Profit – profit below normal profit
Firms may not exit the market even if sub-normal profits made if they are able to
cover variable costs
Cost of exit may be high
Sub-normal profit may be temporary (or perceived as such!)
14. PROFIT
Assumption that firms aim to maximise profit
May not always hold true –
there are other objectives
Profit maximising output would be where MC = MR
15. PROFIT Why?
Cost/Revenue
Output
MR
MR – the addition
to total revenue as
a result of
producing one
more unit of
output – the price
received from
selling that extra
unit.
MC
MC – The cost
of producing
ONE extra unit
of production
100
Assume output is at
100 units. The MC of
producing the 100th
unit is 20.
The MR received from
selling that 100th unit
is 150. The firm can
add the difference of
the cost and the
revenue received from
that 100th unit to
profit (130)
20
150
Total
added
to
profit
If the firm decides to
produce one more unit –
the 101st – the addition
to total cost is now 18,
the addition to total
revenue is 140 – the firm
will add 128 to profit. –
it is worth expanding
output.
101
18
140
Added to
total
profit
30
120
Added
to total
profit
The process continues
for each successive
unit produced.
Provided the MC is
less than the MR it
will be worth
expanding output as
the difference
between the two is
ADDED to total profit
102
40
145
104
103
Reduces
total
profit by
this
amount
If the firm were to
produce the 104th unit,
this last unit would cost
more to produce than it
earns in revenue (-105)
this would reduce total
profit and so would not
be worth producing.
The profit maximising
output is where MR =
MC
