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Formula Plan in Securities Analysis and Port folio ManagementSuryadipta Dutta
Formula Plan in Securities Analysis and Port folio Management INCLUDING introduction,need, types, advantages with constant rupee value plan, constant ratio plan, Variable Ratio Plan, limitations and with every notes.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
Formula Plan in Securities Analysis and Port folio ManagementSuryadipta Dutta
Formula Plan in Securities Analysis and Port folio Management INCLUDING introduction,need, types, advantages with constant rupee value plan, constant ratio plan, Variable Ratio Plan, limitations and with every notes.
noorulhadi Lecturer at Govt College of Management Sciences, noorulhadi99@yahoo.com
i have prepared these slides and still using in mylectures, Reference: Portfolio management by S kevin and online sources
This presentation discusses the importance of having a diversified portfolio with a variety of different kinds of investments and tips on creating a diversified portfolio.
Risk And Return In Financial Management PowerPoint Presentation SlidesSlideTeam
Analyze investment risk and profitability with this professionally designed Risk and Return in Financial Management PowerPoint Presentation Slides. The content ready portfolio risk-return trade-off PowerPoint compete deck comprises of PPT slides such as risk and return of stock bonds, and T-bills, investment strategies of predefined portfolios, risk and return of portfolio manager, measuring stock volatility proportionate, portfolio return analysis, calculating asset beta, portfolio value at risk, ranking the passive income streams impact to name a few. Explain the relationship between risk on investing in the financial market with potential return using portfolio risk analysis PPT slides. Utilize the visually appealing risk-reward relationship presentation design to structure your financial presentation. Furthermore, portfolio risk-return in security analysis PPT visuals are completely customizable. You can add or delete the content if needed. Download this visually appealing security analysis and portfolio management presentation deck to manage investment risk. Our Risk And Return In Financial Management PowerPoint Presentation Slides ensure you feel joyous. You will find the inspiration you desire.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
This presentation discusses the importance of having a diversified portfolio with a variety of different kinds of investments and tips on creating a diversified portfolio.
Risk And Return In Financial Management PowerPoint Presentation SlidesSlideTeam
Analyze investment risk and profitability with this professionally designed Risk and Return in Financial Management PowerPoint Presentation Slides. The content ready portfolio risk-return trade-off PowerPoint compete deck comprises of PPT slides such as risk and return of stock bonds, and T-bills, investment strategies of predefined portfolios, risk and return of portfolio manager, measuring stock volatility proportionate, portfolio return analysis, calculating asset beta, portfolio value at risk, ranking the passive income streams impact to name a few. Explain the relationship between risk on investing in the financial market with potential return using portfolio risk analysis PPT slides. Utilize the visually appealing risk-reward relationship presentation design to structure your financial presentation. Furthermore, portfolio risk-return in security analysis PPT visuals are completely customizable. You can add or delete the content if needed. Download this visually appealing security analysis and portfolio management presentation deck to manage investment risk. Our Risk And Return In Financial Management PowerPoint Presentation Slides ensure you feel joyous. You will find the inspiration you desire.
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
Investment analysis and portfolio management quantitative methods of investme...Arif Hossain FCA
The objective of investment analysis and portfolio management study is to help entrepreneurs and practitioners to understand the investments field as it is currently understood and practiced for sound investment decisions making. Following this objective, key concepts are presented to provide an appreciation of the theory and practice of investments, focusing on investment portfolio formation and management issues. This study is designed to emphasize both theoretical and analytical aspects of investment decisions and deals with modern investment theoretical concepts and instruments. Both descriptive and quantitative materials on
Investment analysis and portfolio management quantitative methods of investme...Arif Hossain FCA
The objective of investment analysis and portfolio management study is to help entrepreneurs and practitioners to understand the investments field as it is currently understood and practiced for sound investment decisions making. Following this objective, key concepts are presented to provide an appreciation of the theory and practice of investments, focusing on investment portfolio formation and management issues. This study is designed to emphasize both theoretical and analytical aspects of investment decisions and deals with modern investment theoretical concepts and instruments. Both descriptive and quantitative materials on.............................
Question 1Risk & Return and the CAPM. Based on the following.docxIRESH3
Question 1
Risk & Return and the CAPM.
Based on the following information, calculate the required return based on the CAPM:
Risk Free Rate = 3.5%
Market Return =10%
Beta = 1.08
Question 2
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship.
Std Dev.Exp. Return
Company A 7.4 13.2
Company B 11.6 18.9
Question 3
Risk and Return, Coefficient of Variation
Based on the following information, calculate the coefficient of variation and select the best investment based on the risk/reward relationship.
Std Dev.Exp. Return
Company A 10.4 15.2
· Company B 14.6 22.9
Question 4
Measures of Risk.
Address each source of risk that is measured and relate it to two models addressed in this unit.
· Your response should be at least 250 words in length.
BBA 3301, Financial Management 1
UNIT VI STUDY GUIDE
Risk and Return
Learning Objectives
Upon completion of this unit, students should be able to:
1. Explain the risk-reward relationship.
2. Calculate holding period returns.
3. Calculate required returns using the Capital Asset Pricing Model
(CAPM).
4. Calculate the coefficient of variation for varying investments.
5. Decompose sources of risk.
6. Contrast measures of risk.
7. Describe portfolio theory and diversification.
Written Lecture
Whenever a business or individual makes an investment decision, risk must be
considered. This unit focuses entirely on the risk-return relationship, providing
tools for measurement, analysis and decision making.
To begin, the term risk must be defined. From a practical or applied perspective,
risk is the probability of losing some or all of the money invested. In finance, risk
is often associated with volatility of variance in returns (around some average
return). Generally, it is assumed that investments that offer higher returns
involve greater risk. For purposes of this unit, risk is measured through two
primary measures:
Standard Deviation, and
The Beta Coefficient
The rate of return allows an investment's return to be compared with other
investments. For one-year investments, the return on a debt investment is:
k = interest paid / loan amount
The return on a stock investment is calculated by the following equation
k = [D1 + (P1 – P0)] / P0
Where:
D1 = Dividends for the “next” year (on a share of stock)
P1= Price of a share of stock, one period into the future
P0= Price of a share of stock today
The expected return on stock is the return investors feel is most likely to occur
based on current information. Return is influenced by the combination of stock
price (capita ...
Tnx group 15
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by-group 9
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by- g 6 envensebles
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Prepared by Students of University of Rajshahi
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Shakil Hossain
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presented by Group 2
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presented by Mango squad
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Portfolio Management and it's objectives
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K.M.Nafiz
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Sadrul amin
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Biological screening of herbal drugs: Introduction and Need for
Phyto-Pharmacological Screening, New Strategies for evaluating
Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
Honest Reviews of Tim Han LMA Course Program.pptxtimhan337
Personal development courses are widely available today, with each one promising life-changing outcomes. Tim Han’s Life Mastery Achievers (LMA) Course has drawn a lot of interest. In addition to offering my frank assessment of Success Insider’s LMA Course, this piece examines the course’s effects via a variety of Tim Han LMA course reviews and Success Insider comments.
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
Embracing GenAI - A Strategic ImperativePeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
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June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
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1. Corporate Commando
Chapter :7
Portfolio Management
Strategies
Value and Growth
Asset Allocation Strategies
Chapter:1
Investment Settings
Measures of Return and
Risk
Determinants of Required
Rate of Return
Relationship Between Risk
and Return
5. Value vs. Growth Investing
It is now common for money management firms to define themselves as
“value stock managers” or “growth stock managers” when selling their
services to clients.
A growth investor focuses on the current and future economic “story” of a
company, with less regard to share valuation.
The value investor focuses on share price in anticipation of a market
correction and, possibly, improving company fundamentals.
The distinction between value and growth investing can be best appreciated
by considering the thought process of a representative manager for each
style.1 In previous chapter, we saw that the price/earnings ratio for any
company can be expressed as:
P/E Ratio=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
where the earnings per share (EPS) measure can be based on either current
or forecasted firm performance.
6. Value vs. Growth Investing
Value and growth managers will focus on different aspects of this equation when evaluating
stocks. Specifically, a growth-oriented investor will:
• Focus on the EPS component of the P/E ratio and its economic determinants;
• Look for companies that he or she expects to exhibit rapid EPS growth in the future; and
• Often implicitly assume that the P/E ratio will remain constant over the near term, meaning that
the stock price will rise as forecasted earnings growth is realized.
On the other hand, a value-oriented investor will:
• Focus on the price component of the P/E ratio as he or she must be convinced that the price
of the stock is “cheap” by some means of comparison;
• Not care a great deal about current earnings or the fundamental drivers of earnings growth;
and
• Often implicitly assume that the P/E ratio is below its natural level and that the market will soon
“correct” this situation by increasing the stock price with little or no change in earnings.
8. Asset Allocation
Asset allocation is a basic decision that every investor
must make is how to distribute his or her investable
funds amongst the various asset classes available in
the marketplace, such as stocks, fixed income, cash
equivalents, real estate , etc.
The strategic allocation is the proportion of wealth the
investor decides to place in each of these asset
classes.
9. Asset Allocation Strategies
Integrated asset allocation
The integrated asset allocation strategy separately examines
(1) Capital market conditions and
(2) The investor’s objectives and constraints.
Strategic asset allocation
Strategic asset allocation is used to determine the long-term
policy asset weights in a portfolio. Typically, long-term average
asset returns, risk, and co-variances are used as estimates of
future capital market results.
10. Asset Allocation Strategies
Tactical asset allocation
Unlike an investor’s strategic allocation, which is set with a long-term focus
and modified infrequently, tactical asset allocation frequently adjusts the asset
class mix in the portfolio to take advantage of changing market conditions.
With tactical asset allocation, these adjustments are driven solely by perceived
changes in the relative values of the various asset classes; the investor’s risk
tolerance and investment constraints are assumed to be constant over time
Insured asset allocation
Insured asset allocation likewise results in continual adjustments in the
portfolio allocation, assuming that expected market returns and risks are
constant over time, while the investor’s objectives and constraints change as
his or her wealth position changes. For example, rising portfolio values
increase the investor’s wealth and consequently his or her ability to handle
risk, which means the investor can increase his or her exposure to risky
assets.
12. Measures of Return and Risk
To properly evaluate any to investment, you must accurately compare their
historical rates of return. A proper measurements of the rates of return is the
purpose of this section.
HPR =
𝐸𝑁𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
=
220
200
=1.10
Here,
HPY = HPR-1
=1.10-1
=10%
Annual HPR= 𝐻𝑃𝑅
1
𝑛
Annual HPY =HPR-1
13. Measures of Return and Risk
In case of declining wealth value the computation as follows :
HPR =
𝐸𝑁𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
And HPY =HPR - 1
In case of multiple year loss over 2 years would be computed as follows:
HPR =
𝐸𝑁𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
And HPY =HPR – 1
In contrast, consider an investment of $100 held for only6 months that earned a return of
$12.
HPR =
𝐸𝑁𝑑𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
And HPY =HPR – 1
14. Measures of Return and Risk
Note that we made some implicit assumptions when converting the
six-month HPY to an annual basis. we assumed that the rate of
return earned during the first half of the year is likewise earned on
the value at the end of the first six months. The 12 percent rate of
return for the initial six months compounds to 25.44 percent for the
full year. Because of the uncertainty of being able to earn the same
return in the future six months, institutions will typically not compound
partial year results. Remember one final point: The ending value of
the investment can be the result of a positive or negative change in
price for the investment alone (for example, a stock going from $20 a
share to $22 a share), income from the investment alone, or a
combination of price change and income. Ending value includes the
value of everything related to the investment.
15. Measures of Return and Risk
Computing mean historical returns.
Single Investment-
For an individual investment there are two summary measures of return
performance.
Arithmetic Mean
Geometric Mean
To find Arithmetic mean,
AM=
𝐻𝑃𝑌
𝑛
And alternative computation,
GM =[𝜋𝐻𝑃𝑅]
1
𝑛−1
Where ,
𝜋 = 𝑇ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 𝑎𝑠 𝑓𝑜𝑙𝑙𝑜𝑤𝑠:
(𝐻𝑃𝑅1) × (𝐻𝑃𝑅2)…………(𝐻𝑃𝑅 𝑛)
16. Measures of Return and Risk
Year Beginning
Value
Ending
Value
HPR HPY
1 100 115 1.15 0.15
2 115 138 1.20 0.20
3 138 110 0.80 -0.20
AM =?
GM =?
17. Measures of Return and Risk
Investors are typically concerned with long term
performance when comparing alternative investments.
GM is considered a superior measure of the long term
mean rate of return because it indicates the compound
annual rate of return based on the ending value of the
investment versus its beginning value. Although , the
Arithmetic Average provides a good indication of the
expected rate of return for an investment during a future
individual year , it is biased upward if you are attempting
to measure assets long term performance.
18. Measures of Return and Risk
Year Beginnin
g Value
Ending
Value
HPR HPY
1 50 100 2.00 1.00
2 100 50 0.50 -0.50
AM =?
GM =?
19. A portfolio of investments
The mean historical rate of return (HPY) for a portfolio
of investments is measured as the weighted average
of the HPY’s for the individual investment in the
portfolio, or the overall percentage in value of the
original portfolio.
Investment Number
of
Shares
Beginning
Price
Beginning
Market
Value
Ending
Price
Ending
Market
Value
HPR HPY Market
weighted
Weighted
HPY
A 100,000 10 $1,000,00
0
$12 $1,200,00
0
1.20 20% 0.05 0.01
B 200,000 20 4,000,000 21 4,200,000 1.05 5 0.20 0.01
C 500,000 30 15,000,00
0
33 16,500,00
0
1.10 10 0.75 0.075
Total $20,000,0
00
$21,900,0
00
0.095
20. Expected Rate of Return (ERR)
The “Expected Return” on a financial investment is
the expected value of it’s return.
The “Expected Rate of Return” is the expected
return per currency invested.
Computing Expected Rate of Return (ERR)
ERR = ∑(Probability of Return)×(Possible Return)
21. Discussion with three situations
Situation1
An investor is absolutely certain of a return of 5%.So
the probability of receiving the return is 1.
The ERR = (1×0.05)
=0.05 or 5%
22. Situation2
An investor expects three types of return in three
economic conditions
Economic Conditions Probability Rate of Return
Strong Economy
Weak Economy
No Major Change in Economy
0.15
0.15
0.70
0.20
-0.20
0.10
–
The ERR = (0.15×0.20)+(0.15× -0.20)+(0.70×0.10)
=0.07
23. Discussion with three situations
Situation3
An investor expects 10 possible outcomes ranging
from -40% to 50% , with the same probability of 0.10
for each rate of return.
ERR = (0.10× -0.40)+(0.10× -0.30)+(0.10× -
0.20)+(0.10× -
0.10)+(0.10×0.0)+(0.10×0.10)+(0.10×0.20)+(0.10×0.3
0)+(0.10×0.40)+(0.10×0.50)
=0.05or 5%
24. Computing The Risk of Expected Rates
of Return
The Risk of ERR can be determined by – Variance, Standard
deviation and Coefficient of Variation.
Variance = ∑ Probability × (Possible Return-Expected Return)2
Standard Deviation = √[∑ Probability × (Possible Return-
Expected Return)2]
CV = Standard Deviation of Returns / Expected Rate of Return
The larger the variance for an expected rate of return, the greater the
dispersion of expected returns and the greater the uncertainty ,or
risk, of the investment.
25. Discussion with two situations
Situation1
An investor is absolutely certain of a return of 5%.So
the probability of receiving the return is 1 and the
expected rate of return is also 5%.
Variance = 1.00(0.05-0.05)2
=1.00(0.00)
=0
Standard Deviation = √0=0
CV = 0/0.05=0
26. Discussion with two situations
Situation2
An investor expects three types of return in three
economic conditions –
Economic Conditions Probability Rate of Return Expected rate of return
Strong Economy
Weak Economy
No Major Change in
Economy
0.15
0.15
0.70
0.20
-0.20
0.10
0.07
0.07
0.07
27. Discussion with two situations
Variance = [0.15(0.20 - 0.07)2]+[0.15(-0.20 – 0.07)2]+[0.70(0.10
– 0.07)2]
= 0.0141
Standard Deviation = √0.0141
= 0.1187 or 11.87%
CV = 0.1187 / 0.07
=1.696
Conclusion – When your investment is in a perfect certainty
than there is no variation, that means no risk.
But in situation 2 , you expect a return 7%,but the standard
deviation of your expectation is 11.87%
29. Determinants of Required Rates of
Return
There are three broad determinants of Required
Rates of Return and these are as follows:
Time Value of Money
Expected Rate of Inflation for a particular economy
Involvement of Risk on Investment
30. Determinants of Required Rates of
Return
Time Value of Money
The present value of money
Future value of money
Expected Rate of Inflation (Decline in Purchasing Power of Money)
Higher the inflation, higher the required rates of return.
Involvement of Risk with Investment
You know, there is nothing where risk is not involved. And it is money we talk
about is more sensitive towards risk. Risk can vary from industry to industry,
company to company, person to person. But the common thing is higher the
risk higher the rates of return person expect from an investment. Although you
may find there is a variation of risk-taking behavior among the individuals
which is influenced by the personal trait of an individual. Risk can be broadly
categorized into two head; one is systematic and other is an unsystematic risk.
31. Determinants of Required Rates of
Return
Systematic Risk: Directly involved with the system
which arises from the macroeconomic factors and it is
not possible to minimize this type of risk through
diversification of investment.
Unsystematic Risk: Unsystematic is a type of risk
which is possible to minimize through diversification of
investment. With this risk, there is a correlation
between risk and diversification.
32. Determinants of Required Rates of
Return
Market change because of the following reasons
A wide range of available investment alternatives
Return on specific assets change dramatically
Change in interest rate over the time period
It does not necessarily need to be the same required
rates of return for all the people. The rate will vary
according to the economic factors and the personal risk-
taking behavior of an individual. So it will be better for you
if you identify the influencing factors and then calculate
your required rates of return on investment.
34. Relationship Between Risk and Return
As a general rule, investments with high risk tend to
have high returns and vice versa. Another way to look
at it is that for a given level of return, it is human
nature to prefer less risk to more risk. Therefore, the
higher the risk of an investment, the higher its returns
have to be to attract investors.
35. Relationship Between Risk and Return
The existence of risk does not mean that you should not
invest – only that you should be aware that any
investment has some degree of risk which should be
considered when deciding whether the expected returns
of that investment are worth it. Therefore, when
considering the suitability of any investment, you must
understand both the likely returns and the risks involved.
The appropriate risk-return combination will depend on
your financial objectives. Some people prefer a low-risk,
steady income stream while others don’t mind taking on
more risk for the chance of making higher returns.
36. Relationship Between Risk and Return
We can understand the expected relationship
between risk and return from the graph below
37. Relationship Between Risk and
Return
It shows that investors increase their required rates of
return as perceived risk increases. The line that reflects
the combination of risk and return available on
alternative investments is referred to as the security
market line(SML).The SML reflects the risk return
combinations available for all risky assets in the capital
market at a given time. Investors would select
investments that are consistent with their risk
preferences; some would consider only low risk
investments, whereas others welcome high risk
investments.