Financial Management

BSCS IV
 Financial Management

Risk & Return

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• Risk
• Risk can be referred to like the chances of having an unexpected or negative outcome.
• Types of Risks:
• Business Risk,
• Non-Business Risk,
• Financial Risk.
• Business Risk: These types of risks are taken by business enterprises themselves in order to
maximize shareholder value and profits. As for example, Companies undertake high-cost risks
in marketing to launch a new product in order to gain higher sales.
• Non- Business Risk: These types of risks are not under the control of firms. Risks that arise
out of political and economic imbalances can be termed as non-business risk.
• Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to
firms. Financial risk generally arises due to instability and losses in the financial market
caused by movements in stock prices, currencies, interest rates and more.

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• Types of Financial Risk
• Systematic risk
• Unsystematic risk.

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• Systematic risks
• also known as market risks, are risks that can affect an entire economic
market overall or a large percentage of the total market. Market risk is the risk
of losing investments due to factors, such as political risk and macroeconomic
risk, that affect the performance of the overall market. Market risk cannot be
easily eliminate through portfolio diversification. Other common types of
systematic risk can include
• Interest rate risk,
• Inflation risk,
• Currency risk,
• Liquidity risk,
• Country risk,
• Sociopolitical risk.

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• Unsystematic risk,
• also known as specific risk or idiosyncratic risk, is a category of risk that only
affects an industry or a particular company. Unsystematic risk is the risk of
losing an investment due to company or industry-specific hazard.
• Business Risk
• change in management, a product recall,
• regulatory change that could drive down company sales,
• a new competitor in the marketplace with the potential to take away market share from a
company.
• Investors often use diversification to manage unsystematic risk by investing in a variety of
assets.

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•Risk Measures

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• Risk / volatility in Stock Price
• Risk measures are statistical measures that are historical predictors of
investment risk and volatility, and they are also major components in modern
portfolio theory (MPT).
• Stock price
The current price that a share of stock is trading for on the market.
Available all information incorporate in the current price

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• The modern portfolio theory (MPT) is a practical method for selecting
investments in order to maximize their overall returns within an
acceptable level of risk. American economist Harry
Markowitz pioneered this theory in his paper "Portfolio Selection,"
which was published in the Journal of Finance in 1952. He was later
awarded a Nobel Prize for his work on modern portfolio theory.

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 Financial Management
• Investment risk is the idea that an investment will not perform as
expected, that its actual return will deviate from the expected return.
Risk is measured by the amount of volatility, that is, the difference
between actual returns and average (expected) returns. This
difference is referred to as the standard deviation. Returns with a
large standard deviation (showing the greatest variance from the
average) have higher volatility and are the riskier investments.

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• Risk measures commonly use the

• Variance σ2
• Standard deviation σ
• Covariance Cov(x,y)
• Correlation
• Beta βi= Cov (ri,rm)/Var(rm)
• Sharpe ratio. SR

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• Financial Volatility
• Four main types of volatility measures:
• Historical volatility (dispersion of returns)
• Intraday volatility
• Implied volatility (options contracts)
• The volatility index (VIX)

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Financial Volatility

Historical Implied

Simple EWMA GARCH IV- Option contract

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• Total Return on stock
• An investment's total return is its overall return from all
sources, such as capital gains, dividends, and other
distributions to shareholders.

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Thank you

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