Risk and return

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Risk and return

  1. 1. Risk and Return
  2. 2. Rates of ReturnReturn comes in two forms: (1) a dividend or interestpayment, and (2) a capital gain or capital loss.For eg. You buy the stock of ABB at the beginning of 2003when its price was about Rs. 250. By the end of theyear the price appreciated to Rs 500 a share. Inaddition ABB paid a dividend of Rs 2.20 per shareThe percentage return on your investment was therefore:Percentage Return = (capital gain + dividend)/ initialshare price= (250+2.2) / 250= 100.88 %
  3. 3. 114.9444.182350.891001000Treasury billsLong term treasury bondsCommon stocks (S & P 500)1925 1999
  4. 4. Portfolio Average Annual Rate ofReturnAverage Risk Premium(Extra return versusTreasury Bills)Treasury Bills 3.8Treasury bonds 5.7 1.9Common stocks 13.2 9.4Maturity premium: The difference between Long term government bonds andtreasury billsMarket risk premium: Difference between rate of return on common stock andinterest rate on treasury billsRate of return on = interest rate on + marketcommon stocks Treasury bills risk premium
  5. 5. Measuring risk• Normal distribution• Standard deviation• Variance

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