Risk and return analysis presentation with suitable examples. A perfect class-presentation file. Prepared by Sumon Sheikh, BBA Student, majoring Accounting and Information Systems at Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh-2224, Bangladesh.

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Risk & Return Analysis
What is Risk?
Risk is the variability between the expected and actual returns.
Types of Risk
Interest Rate Risk
Market Risk
Financial Risk
Liquidity Risk
Foreign Exchange Risk
Country Risk

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Risk & Return Analysis
Income received on an investment plus any change in market price,
usually expressed as a percent of the beginning market price of the
investment
What is Return?
Components of Return
Total Return

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Risk & Return Analysis
Components of Return Analysis

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Risk & Return Analysis
Suppose a stock has an initial price of $64 per share, paid a
dividend of $1.20 per share during the year, and had an
ending share price of $73. Compute the percentage total
return.
Example of Return
$73

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Risk & Return Analysis

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Risk & Return Analysis
Return

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Risk & Return Analysis
Return with Probability & without
Probability
Quarter Probability Return (RA) Return (RB)
Q1 20% 11% 9%
Q2 25% -8% -7%
Q3 30% 5% 5%
Q4 25% 15% 17%
 Example of Expected Return

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Risk & Return Analysis
Expected return (𝐑 𝐀) =
𝟏𝟏+ −𝟖 +𝟓+𝟏𝟓
𝟒
= 5.75%
Expected return (𝐑 𝐁) = =
𝟗+ −𝟕 +𝟓+𝟏𝟕
𝟒
= 6%
Expected return (𝐑 𝐀) =
= .20×.11+.25(-.08)+ .30 ×.05+.25 ×. 𝟏𝟓 = .0545 = 5.45%
Expected return (𝐑 𝑩) =
= .20×.09+.25(-.07)+ .30 ×.05+.25 ×. 𝟏𝟕 = .0580 = 5.80%

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Risk & Return Analysis
Quarter Probability Return (RA) Return (RB)
Q1 20% 11% 9%
Q2 25% -8% -7%
Q3 30% 5% 5%
Q4 25% 15% 17%
 Example of Variance

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Risk & Return Analysis
Quantity Pi RA RB (RiA − 𝐑 𝐀)
𝟐
Pi(RiA − 𝐑 𝐀)
𝟐
(Ri𝐵 − 𝐑 𝑩)
𝟐
Pi(Ri𝐵 − 𝐑 𝑩)
𝟐
Q1 .20 .11 .09 .0031 .20 .0010 .20
Q2 .25 −.08 −.07 .018 .0045 .0164 .0041
Q3 .30 .05 .05 .00002 .30 .000064 .30
Q4 .25 .15 .17 .0091 .25 .0125 .0031

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Risk & Return Analysis

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Risk & Return Analysis
with Probability &
without Probability
Covariance is a measure of the directional relationship
between the return on two risky assets.

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with Probability & without
Probability
Example:
𝒄𝒐𝒗 𝑨𝑩=
.𝟏𝟎𝟖−.𝟎𝟗𝟗𝟑 × −.𝟎𝟔𝟕−.𝟏𝟎𝟕𝟑 + .𝟏𝟐𝟔−.𝟎𝟗𝟗𝟑 × .𝟏𝟏𝟑−.𝟏𝟎𝟕𝟑 +(.𝟎𝟔𝟒−.𝟎𝟗𝟗𝟑)×(.𝟐𝟕𝟔−.𝟏𝟎𝟕𝟑)
𝟑
= −.00244
=.0993
=.1073
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Example:
Correlation=
.𝟎𝟎𝟏𝟓𝟓
.𝟎𝟖𝟒𝟖×𝟎.𝟎𝟏𝟖𝟖
=.9724
=.1026
=.0581
=.848
=.0188

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Risk & Return Analysis
Portfolio
 What are the main objectives of Portfolio ?
 What is Expected Return on Portfolio ?

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Risk & Return Analysis
Assume that the correlation coefficient between A and B is 0.4
What is the expected return of the portfolio comprising of stock A
and B?
 Example of Portfolio Expected Return

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Risk & Return Analysis

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Risk & Return Analysis
Portfolio Variance & Standard Deviation

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Risk & Return Analysis
 Example of Portfolio Variance & Standard
Deviation

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Risk & Return Analysis
. 𝟔

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Risk & Return Analysis
CAPM Sharpe found that the return on an individual stock or a
portfolio of stocks should equal its cost of capital.
CAPM
Where,
R = required rate of return of security
𝑅𝑓 = risk free rate
𝑅 𝑚 = expected market return
𝛽𝑖 = beta of the security
𝑅 𝑚– 𝑅𝑓 = equity market premium
R= 𝑹 𝒇+ (𝑹 𝒎– 𝑹 𝒇)𝜷𝒊

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Risk & Return Analysis
 What is Risk-free Return ?
 The risk-free rate of return is the theoretical rate of return of an
investment with zero risk.
 What is Risk Premium ?
 A risk premium is the return in excess of the risk-free rate of
return an investment is expected to yield.
Total Return

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Risk & Return Analysis
 Example of CAPM
R= 𝑹 𝒇+ (𝑹 𝒎– 𝑹 𝒇)𝜷𝒊
= .05 + (.12 – .05).85
= .1095 10.95%
Portfolio Beta
𝜷 𝒑= 𝑾𝒊 𝜷𝒊
 Example of Portfolio Beta
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𝜷 𝒑= 𝑾𝒊 𝜷𝒊
= (.15×.75)+(.35× 1.95)+ (.30 × 1.38) + (.20 ×1.16)
= 1.4236

25. Thank You