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What is risk?

Risk means uncertainty. In business risk is a circumstance or factor that may have a negative impact on the operation or profitability of a given company. Risk is of different types.

Systematic Risk
Systematic risk often referred to as market risk or risk undiversifiable. Examples of systematic risk such as changes in interest rates, regulatory changes, changes in economic conditions, and others Systematic risk cannot be controlled by the investor, and also cannot be mitigated through diversification. This risk can be measured through the amount of beta. According to the Capital Asset Pricing Model (CAPM), the greater the systematic risk (beta), then the Expected rate of return is also greater.

Unsystematic Risk
Meanwhile, the unsystematic risk, or often referred to as specific risk is the risk that certain events that occurred in the company or the industry which then affect the company's stock price. So, when you buy shares in a company, surely you expect a good return on your investment is. However, the performance of the company itself can be good, could also be bad, caused by certain specific factors. This is what is meant by unsystematic (specific risk). Unsystematic risk is closely related to industry conditions and management decisions. An example is the marketing strategy, the management decision to increase debt, competitors lowered prices, pricing decisions, and other product lines. Recently, for example, the Bank will add value to the issuance of bonds, from Rs 750 billion to Rs 1.3 trillion. This means adding debt, which means improving the unsystematic risk of the Bank. Another example is the price of coal is predicted to fall this year. Unsystematic risk can be minimized by diversifying unsystematic you can also minimize risk by investing in long term. Return Return is the percent amount of money that you get back for every unit you invest. If you invest $100 and get back $105, you would have a 5% return. Risk free rate The return on any investment with such low risk that the risk is considered to not exist. A common example of a risk-free return is the return on a U.S. Treasury security. Required rate of return The Required Rate of Return is the return that is required by an investor based on the risk of the investment. Capital asset pricing model Cap-M" looks at risk and rates of return and compares them to the overall stock market. If you use CAPM you have to assume that most investors want to avoid risk, (risk averse), and those who do take risks, expect to be rewarded. It also assumes that investors are "price takers" who

can't influence the price of assets or markets. With CAPM you assume that there are no transactional costs or taxation and assets and securities are divisible into small little packets. Had enough with the assumptions yet? One more. CAPM assumes that investors are not limited in their borrowing and lending under the risk free rate of interest. By now you likely have a healthy feeling of skepticism. We'll deal with that below, but first, let's work the CAPM formula. Beta - Beta is the overall risk in investing in a large market, like the New York Stock Exchange. Beta, by definition equals 1. Each company also has a beta. You can find a company's beta at the. A company's beta is that company's risk compared to the risk of the overall market. If the company has a beta of 3.0, then it is said to be 3 times more risky than the overall market. As an example, let's assume that the risk free rate is 5%, and the overall stock market will produce a rate of return of 12.5% next year. You see that XYZ Company has a beta of 1.7. What rate of return should you get from this company in order to be rewarded for the risk you are taking? Remember investing in XYZ company (beta =1.7) is more risky than investing in the overall stock market (beta = 1.0). So you want to get more than 12.5%, right?

Ks = Krf + B ( Km - Krf) Ks = 5% + 1.7 ( 12.5% - 5%) Ks = 5% + 1.7 ( 7.5%) Ks = 5% + 12.75% Ks = 17.75%

So, if you invest in XYZ Company, you should get at least 17.75% return from your investment. If you don't think that XYZ Company will produce those kinds of returns for you, then you would probably consider investing in a different stock

5 dividend paying companies in Pakistan


Oct 07 2011 Sep 20 2011 Sep 05 2011 Sep 14 2011 Aug 25 2011

2 3
4 5

Company name Pakistan petrolium Lucky cement Pakistan state oil ICI pakistan Fauji

Dividend per share 41.5 4.00 10.00 15.50 14.05

Dividend yield 10.04 5.02 3.95 11.20 7.53

What is Security Market Line or SML?

Security market line or SML (also known as characteristic line) is the graphical representation of Capital Asset Pricing Model or CAPM. Know more about Capital Asset Pricing Model. Security market line is a straight sloppy line which gives the relationship between expected rate of return and market risk (or systematic risk) of over all market.

The X-axis of the security market line represents the market risk or beta and the Y-axis of SML represents expected market return in percentage at a point of time. Usually the rate of risk free investments is represented as a line parallel to X-axis and it is from here that the SML starts. Fore example if the risk-free ratio is 4%, the beta value of market is 3% and expected return from market is 10%, then expected return will be 4+3(10-4) = 22%; and SML will start from 4% at Y-axis and will pass through 22% when beta is 3. Security market line is a simple yet powerful tool for finding return and risk associated with a portfolio. Investors can plot individual stocks beta and expected return against SML. If the expected return from the stock is above SML the stock is considered undervalued and is predicted to offer good return for the risk taken. If the expected return falls below SML, the stock is considered overvalued and is predicted to offer lesser return for the risk taken.