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Anu PPT.pptx

  1. 1. Advanced Financial Risk Management TOPIC: RETURNS Presented by: Aneha
  2. 2. CONTENT  What is Return?  What are main Components of Return?  What are the types of Return?  How to Calculate Them?
  3. 3. What is Return? “The total gain or loss experienced on an investment over a given period of time is called return.”
  4. 4. Components of Return 1.Yield/Current Return 2.Capital Gain/ Capital Return
  5. 5. Components of Return  Yield/Current Return The most common form of return for investors is the periodic cash flows (income) on the investment, either interest from bonds or dividends from stocks.  Capital Gain/Capital Return The appreciation (or depreciation) in the price of the asset, commonly called the capital gain (Loss).
  6. 6. What are the types of Return?  Realized Return  Expected/Historical Return  Nominal Return  Real Return
  7. 7. Realized Return The actual return earned during the holding period for an investment e.g. dividend, interest payments. Applied on stocks
  8. 8. Expected Return/Historical Return Amount of profit or loss an investment can anticipate. Expected return cannot be Guaranteed.  The investor cannot be sure of the amount of return he/she is going to receive.
  9. 9. Nominal Return  The money made without factoring expenses, e.g. taxes, inflation.
  10. 10. Real Return  The money received after factoring the expenses.
  11. 11. How to Calculate the return R= Vf – Vi R = Ci + Pi – Pi-1 _______ ____________ Vi , Pi-1 Vf = Final Value Ci = Cash Flow Vi = Initial Value Pi = Ending Value Pi-1 = Beginning Value History based/Traditional Method , Modern Method
  12. 12. Example Suppose you have initial investment Rs. 100000 and final value Rs. 200000. then find return? = Rs.200000 – 100000 / 100000 = 100%
  13. 13. Example: Q1 Years Beginning Value Ending Value Dividend paid 1 $ 35.0 $ 36.5 $ 3.5 2 36.5 34.5 3.5 3 34.5 35.0 4.00
  14. 14. Solution R = Ci + Pi – Pi – 1 / Pi – 1 Year 1: 3.5 + 36.5 - 35.0 / 35.0 = 14.3% Year 2: 3.5 + 34.5 – 36.5 / 36.5 = 4.1 % Year 3: 4.00 + 35.0 _ 34.5 / 34.5 = 13%
  15. 15. Example: Q2 Outcomes of Asset A P R ER? 1 0.25 13% 3.25% 2 0.50 15% 7.50% 3 0.25 17% 4.25%
  16. 16. Solution Expected Return Ṝ = ri x Pr If Probability are same: Ṝ = ri / n Ṝ = 45% / 3 = 15%
  17. 17. THANK YOU!

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