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2.  A concept.
 Refines an investment's return.
 Measuring how much risk is involved in producing that
return.
 Is generally expressed as a number or rating.
 Risk-adjusted returns are applied to individual
securities and investment funds and portfolios.

3.  Able to compare a high-risk, potentially high-return investment with a low-risk,
lower-return investment
 Helps to answer a key question that confronts every investor: Is it worth the risk?
 By itself, the historical average return of an investment, asset, or portfolio can be
quite misleading and a faulty indicator of future performance. Risk-adjusted return
is a much better barometer.
 The calculation also helps to reveal whether the returns of the portfolio reflect
smart investment decisions,
 The taking on of excess risk that may or may not have been worth what was gained.
This is particularly helpful in appraising the performance of money managers.

4. There are five principal risk measures:
 Alpha
 Beta
 R-squared
 Standard deviation
 The Sharpe ratio.
Each risk measure is unique in how it measures risk. When
comparing two or more potential investments, an investor should
always compare the same risk measures to each different
investment in order to get a relative performance perspective.

5. The Sharpe ratio. This measures the potential impact of return volatility on
expected return and the amount of return earned per unit of risk. The higher a
fund’s Sharpe ratio, the bette its historical risk-adjusted performance, and the
higher the number the greater the return per unit of risk. The Formula is:
Sharpe ratio = (Portfolio return – Risk-free return) ÷ Standard deviation of
portfolio return
Take, for example, two investments, one returning 54%, the other 26%. At first
glance, the higher figure clearly looks the better choice, but because of its high
volatility it has a Sharpe ratio of 0.279, while the investment with a lower
return has a ratio of 0.910. On a risk-adjusted basis the latter would be the
wiser choice.

6.  The Treynor ratio also measures the excess of return per unit of risk. Its
formula is:
 Treynor ratio = (Portfolio return – Risk-free return) ÷ Portfolio’s beta
 In this formula (and others that follow), beta is a separately calculated figure
that describes the tendency of an investment to respond to marketplace swings.
The higher the beta, the greater the volatility, and vice versa.
 A third formula, Jensen’s measure, is often used to rate a money manager’s
performance against a market index, and whether or not an investment’s risk
was worth its reward. The formula is:
 Jensen’s measure = Portfolio return – Risk-free return – Portfolio beta ×
(Benchmark return – Risk-free return)

7.  A fourth formula, the Sortino ratio, also exists. Its focus is more on downside risk
than potential opportunity, and its calculation is more complex.
 There are no benchmarks for these values. In order to be useful the numbers should be
compared with the ratios of other investments.
 No single measure is perfect, so experts recommend using them broadly. For instance, if
a particular investment class is on a roll and does not experience a great deal of
volatility, a good return per unit of risk does not necessarily reflect management genius.
 When the overall momentum of technology stocks drove returns straight up in 1999,
Sharpe ratios climbed with them, and did not reflect any of the sector’s volatility that
was to erupt in late 2000.
 Most of these measures can be used to rank the risk-adjusted performance of individual
stocks, various portfolios over the same time, and mutual funds with similar objectives.

8.  A rate of return used in financial analysis
 Riskier projects and investments are evaluated based on the capital at risk.
 RORAC makes it easier to compare and contrast projects with different risk
profiles.
 Allocated risk capital = the firm's capital, adjusted for a maximum potential
loss based on the probability of future returns or volatility of earnings.
 RORAC is used more as companies place greater emphasis on firm-wide risk
management.

9.  For example, different corporate divisions with unique
managers can use RORAC to quantify and maintain
acceptable risk-exposure levels.
This calculation is similar to risk-adjusted return on capital
(RAROC); however, with RORAC, the capital is adjusted
for risk, not the rate of return. RORAC is used when the
risk varies depending on the capital asset being analyzed.

10.  Manav, a 35-year-old investor, wants to allocate his investment portfolio among three asset classes: stocks,
bonds, and cash equivalents. He has a total investment portfolio worth Rs 200,000. John aims to balance risk
and return based on his risk tolerance and investment objectives.
Given the following information, determine an appropriate asset allocation strategy for Manav:
Investment Objectives and Risk Profile:
Manav has a moderate risk tolerance and seeks long-term capital growth. He understands the volatility of stocks
but wants exposure to potential high returns. He is willing to accept moderate fluctuations in his portfolio value.
Expected Returns and Volatility:
Stocks: Expected annual return = 8%, Volatility (standard deviation) = 15%
Bonds: Expected annual return = 4%, Volatility (standard deviation) = 6%
Cash Equivalents: Expected annual return = 2%, Volatility (standard deviation) = 1%
Asset Allocation Guidelines:
Manav wants to allocate a portion of his portfolio to each asset class based on his risk tolerance. He prefers a
diversified portfolio to mitigate risk. Based on the information provided, calculate the recommended asset
allocation for Manav's investment portfolio.

11. Time Horizon - Your time horizon is the expected number of months, years, or
decades you will be investing to achieve a particular financial goal. An investor with a
longer time horizon may feel more comfortable taking on a riskier, or more volatile,
investment because he or she can wait out slow economic cycles and the inevitable
ups and downs of our markets. By contrast, an investor saving up for a teenager's
college education would likely take on less risk because he or she has a shorter time
horizon.
Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of
your original investment in exchange for greater potential returns. An aggressive
investor, or one with a high-risk tolerance, is more likely to risk losing money in order
to get better results. A conservative investor, or one with a low-risk tolerance, tends to
favor investments that will preserve his or her original investment. In the words of the
famous saying, conservative investors keep a "bird in the hand," while aggressive
investors seek "two in the bush."
Asset Allocation
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The
process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for we
at any given point in our life will depend largely on your time horizon and your ability to tolerate risk.

12.  Risk versus Reward
 When it comes to investing, risk and reward are inextricably entwined.
We've probably heard the phrase "no pain, no gain" - those words come
close to summing up the relationship between risk and reward. Don't let
anyone tell us otherwise: All investments involve some degree of risk. If we
intend to purchases securities - such as stocks, bonds, or mutual funds - it's
important that you understand before we invest that we could lose some or
all of our money.
 The reward for taking on risk is the potential for a greater investment return.
If we have a financial goal with a long time horizon, we are likely to make
more money by carefully investing in asset categories with greater risk, like
stocks or bonds, rather than restricting your investments to assets with less
risk, like cash equivalents. On the other hand, investing solely in cash
investments may be appropriate for short-term financial goals.

15. THANK YOU