Sapm1

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Sapm1

  1. 1. RISK & RETURN Akshay Samant
  2. 2. <ul><li>Securities to be held </li></ul><ul><li>Funds to be allocated </li></ul><ul><li>Portfolio Analysis, Selection and Management </li></ul><ul><li>Investors are concerned with two inherent </li></ul><ul><li>properties of securities: </li></ul><ul><li>-Risk </li></ul><ul><li>-Return </li></ul>
  3. 3. <ul><li>Total Return: </li></ul><ul><li>C + (P E - P B ) </li></ul><ul><li>R = </li></ul><ul><li>P B </li></ul><ul><li>R = total return over the period </li></ul><ul><li>C = cash payment received during the period </li></ul><ul><li>P E = ending price of the investment </li></ul><ul><li>P B = beginning price of the investment </li></ul>
  4. 4. <ul><li>Return Relative </li></ul><ul><li>C + P E </li></ul><ul><li>= </li></ul><ul><li>P B </li></ul><ul><li>Put differently return relative </li></ul><ul><li>= 1 + total return </li></ul>
  5. 5. <ul><li>Cumulative Wealth Index </li></ul><ul><li>Measures the level of wealth </li></ul><ul><li>CWI n = WI O (1+R 1 ) (1+R 2 )…….(1+R n) </li></ul><ul><li>CWI n = Cumulative wealth index at the end of </li></ul><ul><li>the year </li></ul><ul><li>WI O = beginning index value which is </li></ul><ul><li>typically rupee one </li></ul><ul><li>R i = total return for year i </li></ul><ul><li>(i = 1,2,……,n) </li></ul>
  6. 6. <ul><li>Arithmetic mean: It is the mean of a series of total returns. </li></ul><ul><li>Geometric mean: It is the nth root of the product resulting from multiplying a series of return relatives minus one. </li></ul>
  7. 7. <ul><li>It refers to the possibility that the actual outcome of an investment will differ from the expected outcome. </li></ul><ul><li>It is variability or dispersion. </li></ul><ul><li>It is technically different from uncertainty. </li></ul>
  8. 8. <ul><li>Sources of systematic risk </li></ul><ul><li>Sources of unsystematic risk </li></ul><ul><li>Types of Risk: </li></ul><ul><li>Systematic risk </li></ul><ul><li>Unsystematic risk </li></ul>
  9. 9. <ul><li>Types of systematic risk: </li></ul><ul><li>- market risk </li></ul><ul><li>- interest rate risk </li></ul><ul><li>- purchasing power risk </li></ul><ul><li>Types of unsystematic risk </li></ul><ul><li>- business risk </li></ul><ul><li>- financial risk </li></ul>
  10. 10. <ul><li>Diversifiable risk is unsystematic risk </li></ul><ul><li>Non-diversifiable risk is systematic risk </li></ul><ul><li>Total risk = Diversifiable risk + Non- </li></ul><ul><li>diversifiable risk </li></ul><ul><li>Beta measures the non-diversifiable risk. </li></ul>
  11. 11. <ul><li>Variance and Standard Deviation </li></ul><ul><li>It is commonly used measure of risk in </li></ul><ul><li>finance. </li></ul><ul><li>Expected Return and Risk using Probability Distribution: </li></ul><ul><li>Expected rate of return </li></ul><ul><li>Standard deviation of return </li></ul>

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