Risk and Return

Concept of Risk and Return

Measurement of Risk and Return

Diversifiable and Non diversifiable Risk
Characteristic Line and the Concept of Beta
Capital Asset Pricing Model (CAPM)
Security Market Line (SML)
 Risk and Return
Student Preparation
Read the chapter, Financial Management, 10e, I. M. Pandey, Ch 4-6: Risk and Return and
Beta Estimation (77-129) and answer the following questions:

1. What constitutes the return on an investment?

2. What is expected rate of return of a security? How is it calculated?
3. What is realized return or holding-period return? How is it calculated?
4. What is risk? What are the sources of risk?
5. How can risk of a security be calculated?
6. What is a portfolio? How is the portfolio return and risk calculated for a two-security
portfolio?
7. Does diversification reduce the risk of investment?
8. Define systematic and unsystematic risks. Give examples of both.
9. What is Characteristic Regression Line?
10. What is beta? How is it measured? What are the problems in beta estimation?
11. Do betas remain stable over time? What problem is posed by the instability of the beta?
12. What is the capital asset pricing model? Explain its assumptions and implications.
13. What is security market line (SML)?Explain with the help of a figure. What are it’s
applications?
Risk and Return
1. What constitutes the return on an investment?
2. What is expected rate of return of a security?
How is it calculated?
3. What is realized return or holding-period
return? How is it calculated?
Risk and Return
1. What is risk? What are the sources of risk?
2. How can risk of a security be calculated?
Risk and Return
1. What is a portfolio? How is the portfolio return
and risk calculated for a two-security portfolio?
2. Does diversification reduce the risk of
investment?
Risk and Return
Define systematic and unsystematic risks. Give
examples of both.
Risk and Return
What is Characteristic Regression Line?
Risk and Return

What is beta? How is it measured? What are the

problems in beta estimation?
Risk and Return

Do betas remain stable over time? What problem is

posed by the instability of the beta?
Risk and Return

What is the capital asset pricing model? Explain its

assumptions and implications.
Risk and Return

What is security market line (SML)?Explain with

the help of a figure. What are it’s applications?