h.

au
 Types of Risk

Systematic risk
InterestRate Risk
I. Price Risk
2.Reinvestment Rate Risk
Market risk
Inflation Risk (Purchasing Power
Risk)
Unsystematic risk
Business risk
Financial Risk
Operational Risk
 C) Unso-bnaticak
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Return Analysis

returns are greater than the rate of inflation.

An investor willook forward to getting compensated by way return based on
ofan expected
3 factors-
Risk involved
Duration of investment [Timevalue of money]
Expected price levels [Inflation)
 Risk-Return relationship
correlation exists between risk and retum and is illustrated in Figure. The greater the
A direct
risk, the greater is the potential return. However, investing in securities with the greatest
return and, therefore, the greatest risk can lead to financial ruin if everything does not go

according to plan.

eater ink
Gretor Poternal reta

Low
Low ns
retarr

F4REPC

Understanding the risks pertaining to the different investments is

oflittle consequence unless

you're aware ofyourattitude toward risk. How much you can tolerate depends on many
risk

factors, such as the type of person you are, yourinvestment objectives, the dollar amount of
yourtotal assets, the size
ofyourportfolio, and the time horizon for your investments.
Risk and return trade off:

Investors make investment with the objective of earning some tangible benefit

Low risk leads to low returns. For instance,

the rate ofreturn is low, the risk ofdefaulting is a

incase of governmentsecurities, while

low.
but may also lead to higher losses
High risks lead to higher potential returns,

be calculated using the following formula-

Rate of return on an investment cal

Return -(Amount received - Amount invested)/Amount invested

 AND ITS MEASLU
SECURITY RISK AND RETURN ANALYSS RMENI
II. OTHER RISK

to above major risks, there are

are many
In addition many iore rist
associated with investment in foreign securities. These riske
are

Monetary values
risk

Political environment risk

of foreigngovemment to meet its

Inability indebtedne

The investor should weigh carefully possibility of additional i

risk
with
foreign investment against his expected return when investin
ivestingin
securities rather than domestic securities.

MEASUREMENT OF RISK
One cannot predict with certainty as to whether the price of a stoct
whether the price of a stock will or decrease or by how much
go up
change.The reason is that analyst cannot understand and predict the poi
social and economic forces fully to permit his pol
predictions beyond doubt. A
must provide reasonable estimates of returns. Ang
Quantification of risk is
ther
necessary. Thus, risk is associated with the
variability in the likelihood
Outcomes. If the returns of an asset have no variability, it has no risk.
different Ther
ways to measure of
variability returns or the risk associated
asset. Various with
risks can be calculated as follow:

Types of Risk

Behavioural Methods
Quantitativeor Statistical

Methods
1.BEHAVIOURAL METHODS
Various behavioural
methods for
measuring risk are as
follow
Sensitivity or Range
Analysis
Probability Distribution
1.
Sensitivity or
Range Analysis:
are
possible under different Where ditferent returns Irm an
circumstances, more than aset
returns may be made. These one forecast of
returns may the tiafure
likely' and 'pessimistic. The be regarded ias
range of the return is 'optioats
highest rate of return and the
lowest rate of differene between
return (i.e.
Optimistie Return
 26 SECURITS RrSK AND RETURN A YSIS ANDET MEsst REEN
to this
PessimisticReturn). According measure, an asset having greater range
aid tobemore risky than one having lesserrange. It can be explained with
help of following example
Suppose two Assets A and B is given. Their respective rate of return 15

below
givenas
ASSET A ASSET B
Cash Outlay 10 Lakh 10 Lakh
Initial

Rate of Return

Pessimistic 12 8
14 14
Most Likely
16 20
Optimistic
4 12
Range (Highest Lowest)
B of returns considered more risky a
Asset having greater range is

to asset A.
compared
:
2. Probability Distribution One of the main limitations
of Range analysis

based upon two extreme values i.e. higher value and lower
value. 1 he
is that it is
use of
With an asset can be measured more accurately by
risk associated
the chances of its
distribution. The probability of an event represents
probability
be kept in
While assigning probability, the following rules must
occurrence.

mind:
The positive outcomes must be mutually exclusive and

The probability assigned to an outcome may vary

However, this value cannot be more than
1.
exhaustive

between 0 and .
The sum total of probabilitiesmust be equal to 1

of 1, while
is assigned a probability
Ifan outcome Is certain to occur, it

of 0. Thus, a
an impossible outcome
is assigned a probability
can never be greater than or lower than 0, it can never be
I
probability
their
a negativenumber. However, on the basis of their sensitivity,
be valued in between 0 to 1.
probability can

any asset the weighted average of all

The expected rate of return for is

This can be
possible returns multiplied by their respective probabilities.

represented as follow

N
ECR) 2 Pi X Ri
 RIERISK AND
RETURN
Where IS AND ITS MEASU REMENT
ANALYSIS
E(R)Expected eturm, 27
Nno. ofpossible
outcomes
Pi-Possibility

o
Following
EXample
example
:
RiRateof
the
associatedwith ith
return fortheith
expected rate of
possible outcomes

possible outcome

return for asset A is

m
Retur % Probability (P)
presented

P, R,
10

05
30
.20
8 1.40
20
1.60
.30
2.70
10
.10
1.00

.05
0.55

8.05%
Thus, expected average return is
8.05%.
11. STATISTICAL/MATHEMATICAL METHODS
Various statistical methods are as follow

Standard Deviation

Co-efficient of Variations

Regression Equation

4 Beta(B)

Alpha(a)

6. RHO(P)
Standard Deviation: This method is the most common
1.
quantitative
measure the
of companies used this method to
mcasure of risk of an asset. Most for most types
financial risk because
its knowledge permits probabilitystatement
of distribution.

yA:
slt in erationS1ble Variance
Standard ratio af and Stande a=l6
 Standard SECURYTY RISK AND
average mean deviation is REIuN ANI YSIS
a AND ITS
Dorttolios. tvalue, an
nd its
measures total
ameasure of
measures riskdispersion atound the
MEASE
REMENT
for expected or
both individual
SD- variation
about assets and
IR expected return. for
E)1P Symbolically
R,RateofReturm
E
-Expected Rate
of Return
For P-Probability
Example: Return
and
Rate of ofassetA
probability
and Bis
ASSET A givenbelow
Return Expected
Deviation
R, (%) Return Std
E(r (R Deviation
Probability
Weighted
Er)) Standard
R-E( Deviation

IStandard
Deviation
10
12
12
12 0.25
Probability
14 0
12 0.50
0
0.25

Standard
Deviation N2 =1.414
Rate of ASSET B

(
Expected Deviation
Return Ri
IR E
Return Std
(%) E(T)
Deviation
Probability
Weighted
(Pi) Standard
IRi
Deviation
Er) IStandard
Deviation

6 12 Probability
36 0.25
12 9
12 0 0 0.50
18 12 36 0.25

18
Standard Deviation V184.243
Asset B is more riskyasits standard deviation is higher than Asset A.
 is at eveep
iation
ation
des imitation
its linm
ifs
W has to
it ieve
highe
eks: used of va
stockS; be
steck iont
VarlatioSStandard
ol individual
mdvdial
can co-etno
co-eflie
retrn unit
return unil
ol espeee
of o
of variateon lio per
2 risk
ofrsk
(oeficient
tion
Co-ellicient
caknlation
of porthOo
in hich
n which
risk
porttoli risk

fe torpredetermined
for Deviation
petlolio
otnl eurn
reiirn of
o/ dispersion
Standard
Mean co-ef
eyetedmeasure A and asser
below
relame as ofVariation ofasset
caluiated
example
Co-eflicicnt
in above
as
For Example:
iscalculated 1.4140.I178
0.1178
vartion
A 12
Asset
03
4.245-0.3536
Asset B 12
is another
statistical

Asset
Bismorerisky. Regression
formula:
Equation: following
3.Regressionrisk by using
portfolio
+E
measuring
Y -a+px
period
in a given in verticalaxi
Where from security line crossed
Y Return I where
the
=
a Alpha or
intercept

ofstocks
Beta orslopofregressionin estinmating value
B involved It is un
or error is b or beta.
E =Epsilon of equation
4. Beta (B) :
The most important
part
return and market indeex
return. It shou
chan
between stock against percentage
show the relationship are regressed it shows po
in price of
stock
change and positive. Usually
percentage be negative to market
index. Beta may a movement contrary
market price reflects
stock as well as pot
beta
negative
market beta because both for individual
useful piece of information
provides
it is better
used in analysis ofportfolio.
but as a measure of risk,
section and horizontal
a
5. Alpha (a): The distance between inter
returns an
called alpha. The size
of alpha exhibits stocks unsystematic
average return
independent of market return. If alpha gives positive values
healthy but alpha expected value
sign is zero. The beliefs of many invest
that they can find stocks with positive alpha's and have a profitable ret
out of
portfolio
theory also maintains that the alpha'sof stocks will average
properly diversified
portfolio.
 30 SECURTY RISK AND RE1RSAEYSES AND IsMEASE REMMENE
6. RHO (P): Rho is the correlation which
co-efficient describes fhe
dispersion of the obscrvation around the
eficient expresses co-relation
regtssa dics The correlation c0
between two stocks. for and Thee
exanple: 1
correlation co-efticientwould be +1.0 ifan
upward movenset of anotlier secirity
or vicea- versa.If the movement of two
stocks are not m sane direction the
correlation co-cfficient will be
negative. If there was no relatietship bctween the
movement of two stock5, the correlation would be
zero. Fhe correlation cO-
efficient can be calculated in the
following manner

Pij-R-R/ Rxi-Ri
i
Where RxiXth possible return for security i

Rxi Nth possible return

Rij Expected
for
security j
for and
return I
j
Pxij Joint probabilitythat Rxi and
Rxj will occur simultaneously
The relationship or
degrees of correlationamong securities indicate that
there is perfect correlation,diversification
will not reduce
portfolio risk below tne
lower of two individual securities.
Thus, correlation co-efficient also
help in
determining the extent top
which portfolio has eliminated
unsystematic risk.

CONCEPT OF RETURN
MEANING
Return from a venture is concerned with benefit from
that venture. In
securityanalysis, the return is invariably associated with a
percentage and not a
mere amount. T Tic major purpose of investment is to set a return or income on
funds invested. Return on investment
may be because of income, capital
appreciation or positive hedge against inflation. Thus, return on a typical
investment will have two components which are as:

Return

Periodic Cash Receipts Change in price of asset

Periodic cash receipts on investment in the form of interest or dividend

Change in the price of asset wlhich is called capital gain or capital loss
or market price appreciation or depreciation. The second element of
return is the difference between the purchase price and price at which
asset can be sold.
Total Return Income t/- Price Change
SERIY RISK AND RETRN ANALY SSAN 1IS MEAS REMENE
n security analysis, we are concemed with returns from the investor's
perspective. Our main concern is to compute or estimatethe return foran investo
on a particular investment. The investment is
essentially financialassetsay a a
share ora debenture or some other financial
instrumcnt
RATE OERERRN
The return of investment must
refer to a return of particular period of time
To generalizethe retun measurement as
applicable to both fixed income security
and variable income security is measured as a ratio. The rate of return on an
sold
investment for period is defined as follows:-

end- Price
Rate of Return Annual Income+ [Price at at the beginnimglx loo unds
Price at beginning of the

100
year
w
nte

Forexample
Price at
:
following information about equity share
the beginning 500
is given
The
gnity

timal
ofthe year=R sand
Dividend at the end of the year = 25 luale
mum
Price at the end ofthe year =7 600 n that
ch the
+(600- 500)
Rate of return=
500
x 100 25% mder
ole lot
apital
It is helpful to split the rate of return into two components, viz; current yield eto a
and capital gains/losses yield as follows
been
Annual Income Priceat the end- Price at the beginning
Price at the beginning of the year Price at the beginning of the year cision
vidend
Or er tax

Current Yield +Capital gain/loss

yield be re-
However, for most purposes, yield is the proper rate of return from a
lin the
security, the capital gains or losses must be properly considered.
smuch
MEASUREMENT OF RETURN
The purpose ofinvestment is to get a return or income on funds investedin
different financial assets. The most important characteristics of financial ets
are the size and variability of their future return.
pobes
bules
One of the mostimportant functions of the finance manager is to measure
prultr
return which
the business earns an account of its business activities The return
derived by business from its
representsthe benefits operations. Different person
give different meanings to those benefits according to the nature of ineome
There are different approaches for the measurement of return
 32 SECIRITYRISK AND RETRN ANAISEN ANDIES MEASURENMENT
APPROACHES FOR MEASsUREMENT
The various approaches for measurement are given beh
Approaches

Profit Approach Income Approach Cash Flow Approach Ratio Approach

1. Profit
Approach: According to this approach, the return from a business
IS measured on the basis of
profits it earns. According to Accountant, the term
profit is the excess of revenues
over expenses of a busines over a
period as
determined to
according accounting principles and procedures. According to
economists, profit is simply
temporary excess returns to innovators or
entrepreneurs who undertake business and
In other words, in ready to bear the risk in the business.
business language,
profit represents the difference between
Sales revenue and
operating and non operating
expenses.
However, it be appropriate for finance
will
manager to adopt accountant's
approach while reporting financial
results to the shareholders
and tax authorities.
2.Income
Approach Income has a more
specificand definite meaning as
compared to term profit. Income in
in
precise accounting process has been followed
computations. Hence, it may be defined
as
profits". Income is classified in "Accounting measurement of
following ways
Earnings before interest and tax
income of the business which is
(EBIT) It is termed as :
calculated as:
operating

Operating Revenue-
Operating Expenses
Earnings before tax (EBT) : It
represents the excess of firm's
revenue and its total total
expenses. It can be calculated
as:
(Operating Incomes +Non Operating
Non Operating
Expenses)
Incomes) (Operating Expenses +
Earnings after tax (EAT): It represents excess
all expenses of all revenues over
and taxes paid by the firm. This
finance useful for approach is
manager while computing the
firms from view profitability of two or more
point of different
persons interested in the firm.
3.Cash Flow
Approach :According to this
business is measured in
approach, the return from a
terms ofcash flows
during a particular generated by due to
it
its
period. This operations
approach is useful for the finance
taking capital manager while
budgeting
 SECURIY RISK AND RETURN ANALYSIS AND ITS MEASUREMENT

Cash flow representsdifference between cash revenues and cash

payment
of afirm.In case, revenues are
larger than payments the firm has net cash
inflow
and vicea- versa.

4. Ratio Approach The term ratio means mathematical relation betweea

two figures. As finance
manager has different ratios to evaluate the
performance
and solvency position of the firm with
other firms and over the time period also
Fanance manager should use ratios and follow the
cautiously accounting
principles and policies with care while determining return from an investment o
a portfolio

METHODS OF MEASUREMENT
1he various methods of measurement are as follows

Methods

TraditionalMethods Modern Methods

Estimated Actual Earning Holding Returns and Central

Dispersion

Yield Yield Yield Period Probability Tendency

Yield Distribu-

tion

L TRADITIONAL METHOD
Computation of yield to measure a financial asset's return is the simples

and oldest technique of measurement. Yield can be classified as

1. Estimated Yield means returns hoped get before

to the investment

made orwhile making investment. It is calculated as follow

Estimated Yield EXpectcd Cash Income

Current Price of Asset

2. Actual Yicld
means return actually earned. Realized return is history

can be calculated as follow

Actual Yield Cash Income

Amount fnvested

Actual yield can be calculated both for bonds and stock in the
ollowie

manner
 SECTRIEY RISK ANn RETLRN AS YS MESt REMENY
maturity peril Y en then can be
Bondst Bonds usally have a

cakulated either for the current period or to mateety Cuerent yield md

as follow
vield tomaturity is calculated

YieldAnmal Coupon Price

Current
PurchasePrice

Yield To maturity C M

Where C Annual Coupon

M-Maturity or par value of bond
P Purchase Price
NNo. of years remaining to maturity
in 2010 is 900.
For example: An investor buys a bond in 2008, maturity
1000. fetches 90 every
has a maturity value of 10 years and par value of
It

It

year. Yield
will be
Current Yield= 90/900 10%

Yicld to maturity=90 + 1000-9O010.5%

10

Stock :The return on stocks is measured by finding out dividend

yields as well
as
can be estimated on expected
yields. Dividend yields

actual yields:
cash dividend
Estimated Yield-pected
Current Share Price

Dividend received
Actual Yield
= of Period
Price of the share in the beginning

takes with its purview company growth,

3. Earnings Yield: Earning yield a
cannot be called
and retained earnings. Earning yield as
stock price appreciation a more accurate measurement
consider earning yield,
true measure but analysts for the
dividend and retained earnings. Besides, caleulating
both
it reflects and for making
a company's growth prospects
market s attitude towards
on that basis, the technique
of ratio
different companies
comparisons among ratio. P/E ratio
and E/P indicate
price earnings
analysis is applied by
calculating and E/P
toearn one rupee
be paid to purchase investment
how many rupees must Earnings
will
share price.
in coming year
divided by present
1S
earnings expected
be calculated as,
Earnings
E/P Ratio
Price of Share
 SEARUEY RISK AND RENRN ANALYSIS AND IESMEASU REMENE
Price of Share
P/E Ratio
Earnings

ForExample :Selling Price of stock 36

Famings 3
EPRatio-3/368.33%
P/E Ratio 36/3-12 times
MODERN TECHNIQUES
Various modern techniques are as follow:
one
1. Holding Period Yicld (HPY): Holding period yield is
of ne
in return. This measure appears more rational and clearly
technique measuring
defined. lt servestwopurposes
lt measures the total return per rupee of the original investment.

Through this method, comparisons can be drawn of any asset s

expected return.

The holding period yield (HPY) can be used for any An asset can be
asset.

and for future periods. For example;

compared with another both historically
real estate and bonds. The holding
return from savings account, stock money,

period yield;
Income payment received during the year
+ Capital
change for the period
at the beginning of the year
Price in rupee of original investment

over the specified

Thus, HPY considers everything the investor receives
invested in
period during which the asset is held relative to what was originally
the asset. It also considers allincome payments and positive and negative capital
HPY also measures past receipts of payments as well
changes during the period.
as estimated future income.
on assets from time to tume l
2. Probability Distributions : Return vary

a amount of ncone But

return can be predicted, re'sults in receiVng particular
it

not receve
that an investor may Or may
when there are two or more alternativcs cach
Analyst considcrs
an amount as return, and then uncertainty 18 involved
attachex a preobability
or a reasonable rangc of outcomes and
particularoutcome
ther probabilities is callecd
it. group of possible outcomes, along with
The
to rate of returmsAn
help m predicting possible
probability distribution and
it

of prices through theirfroquency

analyst is guided by the past behaviour a rough and
estimate of future probabilities is always
distributions. But the
 SECURIEYRISK AND RETURN ANAYSSAND IIS MEASU REMENT

calculations aad exact rate ofreturn cannot be predicted. Moreover,

dastrikbutions anre to some extent subjective. The degree of preciseness

ds o how the individual uses the techaique. For example; an analyst

Past distributions analysesa particular situation. The price of a stock is
Sehng a40. The analystthinks that this price would go as low as 25 by the
nd of the year or the other posibility is that it will rise to 50. He assigns
peebabilitices feom 25 to 50. But even after calculations, the analyst would strive
atapproximatecesults.

SCeatral Tendency There are various methods ofcentraltendency 1.e.

an dian and mode All these methods describe the average value of a
distrbution. Artthmetic mean is the most basic and most accurate statistics ot any
distribution.
Mean ofany probability distribution is called its expected value. The
Dean of a holding period yield is called
probability distribution its expected
retun

4Measureof Dispersion Dispersion method helps to assess risk in

eceving a reward or return on investment. Greater the potential dispersion,the
grealer will be the risk. All the tools of dispersion are useful to determine HPY.
this is so because price of stock
keeps on increasing.The central problem of
estment is to obtain the highest net return without sacrificing those qualities
essentialto a particularinvestor.

Thus the framework of return and risk, the entire study on

within
vestment is based. Return can be measured traditionally through
yield to
maturity indicated returns and statistically through mean, standard deviation,
mean dispersion etc. These measures have certain limitations also. But these
provide base for measuring return.

SECURITY RISK AND RETURN OF A PORTFOLIO

INTRODUCTIONN
Portfolio analysis deals with the determination of future risk and return in

holding various combinations of individual securities. The portfolio

expected
return is the weighted average of expected returns, from each of the individual
securnties,with weights
representing the proportionate share of security in total
nvestment. The portfolio expected be something less than a
variance can
weghted average of security variances. Therefore, an investor can some time
educe risk by adding
another security with greater individual risk compared to
ny individual security in the portfolio. Thus, diversification of portfolio aims at
 AND ITS MEASU REN
SEE RTY RISK AND RETURN ANALYSES AEASUREMENT
or even elimnation of non systematic risk and
and
reduction
can even estimate
of investors. An investor hie
achieving
objectives the
of assets from
expected risk level of agiven portfolio proDe pected
retg
RETURN OF A PORTFOLIO aiversifcatio
of view, it is not advisable for the
From investor's point

funds of an individual in one single sccurity, Therefstop

the entire
should invest their entire funds in a portfolio ratho ti
that investors
in one basket. Each portfolio return is treated as a
funds weighted
the is but natural that the
of all the assetsheld in portfolio. it
expeet ragg
ted
portfolioshould depend on the expected return and estimated
ted risk
risk of retd

security contained in the portfolio.

It is also important that
amount eac
unts
each security should be decided keeping in mind all the economic
other factors. For exanmple; investorputs his funds in five
securities
period return of the port folio is described in the table given below:

SECURITY PROPORTION EXPECTED

OF FUNDS RETURN OF WEIGH
INVESTED HOLDING RETUR
PERIODD (Proporti
Funds In
xExpee
Retun
A 20 10%
15 20%
18 10% 1.8

15 15% 2.25

E 20 15% 3

12.05%

RISK ON A PORTFOLIO
As the return of the portfolio
is dependent upon the return of ind

security, risk on a portfolio is not same as risk on individual securities

entire portfolio. The risk on the portfolio is reflected in the variability of

from zero to infinity. The expected return from portfolio depends

probability of theoccurrence ofthe returns of the securitiesand

their

contribution to the risk of the portfolio. Various measures of measurement

re used, average, standard deviation, co-efficientof variationetc. The f
able shows how the absolute deviation can be calculated:
 SECURITY RISK AND RET RY AYU AN 1ISMEASE REMENT
SIS
38
RETURN DEVIAfIO PROBABIL
EVENT PROBABILI PROBABII FTY X
TY (%) 1TY
RETURN DEVIAT1O
Return
N
Probability|
-0.5
010 10 1.0

20 -10 -2.0 -5.0

0.2

1.5
0.30 20 6.0

10.0 10 4.0
0.40

15 0
which
Thus, all possible outcom s are analyzed to determine the amount by
amount.
the value deviates from expected
more
Another measure is standard deviation and variance.
It is slightly

both these measures are

complex but preferably analytical measures. Although
is generally preferred for investment
used interchangeably, the standard
deviation
also increases
increases,the portfolio's standard deviation
analysis.If portfolio most
market portfolio represents the
and total stock adds risk to portfolio. Thus,
an investorcan buy since it includes
all risky
diversified portfolio of risky assets
stocks.

RISK RETURN TRADE OFF

The simple rule in investment management
is higher the risk,
-the greater
this
lower is the risk, lower is the reward. So,
should be the reward. Similarly,
want to achieve their
risk return trade
off has become important if an investor
shares of companies may be
target.
Based on risk return relationships, ordinary
classified as follow

HIG TURN AROUND STOCK

EMERGING BLUE CHIPS
ABOVE AVERAGE
AVERAGESUPER STOCKS
1.OW DEFENSIVESTOCKS

RISK

risk stocks and hence

returns are relatively
Defensive Stocks are low with
who want to invest in securities
low. But they suit investors
dividend yield of such stock
return and low risk profile. The
regular
yield is low.
may be high, whereas capital gains
and hence returns are
to the average risk category
Super Stocks belong
stock.
than thoseofdefensive
average but higher
 REMEST
SECURITY RISK AND RERN ANALYSIS AND ITSMEAS averge
risks
hav above
The Emerging Blue Chips are those which takers enerally
risk seck
averaga n thes
as well as above averag returns. Above
The rett
tvpes ofsecurities,
eterto invest in these and are
IS better than Defensive super stocks.
estors
investd
higher riskS, 1ho those high
Stocks involve only
around others. In these securities
d ready
to bear
compared to al
in high risky securities
Oare ready to invest
of risk due to market fluctuations.
RISK

RA level

FOR EVALUATING
Aproject giving higher
PROPOSAL
rate ofreturn
invoives
its
a
TO
higher
capacity
pacity
MINIMZ
ce ofrisk.
degree
to bear
the risk.
TFo
While

in nind
has to keep
cen8 a project, a firm
criteria
is adopted

ECt reject proposal,

or a following

1. Select the least Risky Proposal

return
2. Avoid proposal with fluctuating

3. Apply Benchmarks
that proposal
to
average approach only
Adopt weighted
Prop
oposal
A :
firm will acco
cept
are arranged
according.
having
1. Select the least Risky all proposals The proposal
risk. For this purpose involved.
which has least to risk factors
according those
of risk and ranked and higher
return is accepted. avoid
degree should
of least risk
A firm
first rank
in respect
returns: For example; a proposa
with fluctuatingin the returns. as comparea
Avoid proposal fluctuations be preferred more
which have larger to 14% should
10% the fluctuations
proposals in return from higher
having
fluctuations
from 3% to 25%.Thus,
return
to a project giving in the proposals. determines
dilferent
firm
risk involved mnm119
will be the
: According
to this,
firm may
decide
the
3. Apply Benchmarks risk levels. The
for the proposal
different
not going to accept
below whieh t
standard rates is
return
acceptable

Forexample:
OF RISK EXPECTED RETURN
DEGREE
10%
Low
28%
Mediu

High
44%
 40 AND IES MEASUREMEN
RTY RISK AND RETURN ANTYSES
of the
Here, pro

stors
higher rate of
be accepted according to taking ability
risk

are the higher risk takers they can accept

proect w
return i.e. 44%.
opt
weighted
weighted averageapproach: It will be more appropriate
average approach while selecting a proposal or identilying
to adopt
a proje
on the basis of are assigned to
risk and
the future rets return. Under
Under this
this approach, probabilities
approach, pl
return on the basis of hte
and then
possible future conditions
expected return is
computed.

QUESTIONS
SHORT ANSWER TYPE
QUESTIONS
.Whatdoyou mean by Risk ? Portfolio
2. Define
Systematic Risk.
3. Explain
Unsystematic risk.
4. Differentiate
Systematic risk and Unsystematic risk.
5. What is Market Risk ?
6. Define Interest
Rate Risk.
7. Define
Financial Risk.

3. Differentiate Beta and Alpha.

.Whatdo you mean by Estimated Yield ?
10. Explain
Holding Period Yield.
ESSAY TYPE QUESTIONS
1. What do you mean
by Portfolio Risk? What
Discuss various are the causes of
types of risk. Risk?
2. Discuss various
methods involved in
3. What do you mean measurement of Portfolio
Risk.
by Portfolio
measurement ofreturn. return Discuss various
methods for
What do you mean
by
Return trade off can be Security RIsk and Security
achieved. Also Return? How
return measures can be discuss Risk
used various areas
where risk