RISK & RETURN

Akshay Samant

Securities to be held Funds to be allocatedPortfolio Analysis, Selection and Management

Investors are concerned with two inherent

properties of securities:-Risk-Return

Total Return: C + (PE - PB)R = PB

R = total return over the periodC = cash payment received during the

period

PE = ending price of the investment

PB = beginning price of the investment

Return Relative C + P E = PB

Put differently return relative = 1 + total return

Cumulative Wealth Index Measures the level of wealthCWI n = WIO (1+R1) (1+R2)…….(1+R n)CWI n = Cumulative wealth index at the end of

the year WIO = beginning index value which is typically rupee oneR i = total return for year i (i = 1,2,……,n)

Arithmetic mean: It is the mean of a series of total returns.

Geometric mean: It is the nth root of the product resulting from multiplying a series of return relatives minus one.

It refers to the possibility that the actual outcome of an investment will differ from the expected outcome.

It is variability or dispersion. It is technically different from uncertainty.

Sources of systematic risk Sources of unsystematic risk

Types of Risk: Systematic risk Unsystematic risk

Types of systematic risk: - market risk - interest rate risk - purchasing power risk

Types of unsystematic risk - business risk - financial risk

Diversifiable risk is unsystematic risk Non-diversifiable risk is systematic risk

Total risk = Diversifiable risk + Non- diversifiable risk

Beta measures the non-diversifiable risk.

Variance and Standard Deviation It is commonly used measure of risk in

finance.

Expected Return and Risk using Probability Distribution:

Expected rate of return Standard deviation of return