A smart presentation about risk and returns..how they are calculated and how they are managed by any firm..a descriptive analysis.

1. Risk and Return Variability or uncertainty Of returns Gains received by Way of income + increase in Market value Presented By: Monu Jain CH Institute Of Management & Communication

2. REALIZED RETURN & EXPECTED RETURN Historic or realized return as in case of a bank deposit at a fixed rate of interest. EXPECTED RETURN Have to be sufficiently high to offset the risk or uncertainty. Invest in Equity or not

3. MEANING OF CASH Periodic cash receipts by way of interest, Dividends. Eg. Yield on a 10% bond of Rs. 900 is 11.11% The appreciation/depreciation in the price of the asset. i.e. difference between purchase & sale price of assets. Components Of Return

4. Objectives : How to calculate Return ? What are its components How do we Measure risk What is Portfolio ? What is Capital asset Pricing model ? What is risks ? What are its Components ?

6. How to measure return? Dividend regular cash flow Change in the value of stock over t -time Value of stock in beginning

8. Let us take the case of HLL from 1991-1998 71.29 21.04 20.23 15.90 92.33 36.12 ? ? 33 249.60 1998 ? ? 25.50 207.60 1997 49.52 20.03 29.49 18.75 121.20 1996 22.71 16.95 5.76 15.00 93.60 1995 16.52 13.91 2.61 12.00 88.50 1994 70.54 15.14 55.41 8.4 86.25 1993 149.70 25.46 124.24 6.3 55.50 1992 - 24.75 1991 Rate of return (%) Dividend Yield (%) Capital gain Pt -P t-1 / P t-1 Dividend per share Share price (Pt) Year

9. HLL’s Annual Rates of Return

11. Risk components Uncertainty of return is Market risk Liquidity risk Interest rate risk inverse Inflation risk Business risk Financial risk

20. Calculate risk in Alpha ltd. - =√ 480 = 21.9% 480 Total 80 0.2 400 20 30% 2 160 0.1 1600 -40 -30% 5 80 0.2 400 -20 -10% 4 0 0.4 0 0 10% 3 160 0.1 1600 40 50% 1 P i Return (ki%) Outcomes

25. Formula to calculate risk in portfolio is – standard deviation of the portfolio Standard deviation of The security Relationship of The two securities

30. Hence though initially the risk gets diversified, due to some systematic or market risk the diversification cannot completely negate the risk

31. Number of securities in portfolio Risk Risk Reduction through diversification. Non – diversifiable Risk Diversifiable Risk The effect reduces with No change in market risk Increase in the portfolio size

32. Similarly if we calculate Return of Alpha– 12% and Beta – 18% and std. deviation – Alpha -16% and Beta – 24%

33. If we plot the data on a graph Efficient frontier Inefficient frontier Cor = - 1.0 Cor = - 0.25 Cor = + 1.0 Cor = + 0.50 Cor = - 1.0 alfa beta

38. Capital Asset Pricing Model

40. Defensive securities EXPECTED / REQUIRED RATE OF RETURN ON Y AXIS RISK PREMIUM FOR UNCERTAINTY Aggressive securities Beta 1.0 Km Rf SML

41. Defensive securities EXPECTED / REQUIRED RATE OF RETURN ON Y AXIS RISK PREMIUM FOR UNCERTAINTY Aggressive securities Beta 1.0 Km Rf SML X Y