Presented by:

Rie Ann
FIXED DEPOSITS
• Safest (low risk)
• Lowest Return

BONDS
• Less risky than shares
• Higher Expected Return

SHARES
• Most Risky
• Highest Expected Return
 thechance that an
investment's actual return will be
different than expected

 implies a degree of uncertainty

 The higher the variability, higher

will be the risk, the lower the
variability, lower will be the risk.
 VOLATILITY

 Presence of risk
 Difference between actual and
expected return is measured by
standard deviation.
 The larger the standard deviation, the
greater the overall risk of an
investment.
 Credit

Foreign
Political
Exchange

RISK
Interest
Industry
Rate

Market
Rate
 in its simplest terms, is the money
made or lost on an investment
 expressed nominally as the change
in dollar value of an investment over
time

 Positive return - profit, or money

made, on an investment or venture.
 Negative return - loss, or money
lost, on an investment or venture.
Rate of Return (R)
R= capital gains yield+ dividend yield
=

Where,
P1= Price of share at the end of the year
P0= Price of share at the beginning of the year
D1=Dividend per share in year 1
EXAMPLE:
Joey purchased a stock for $5000. At the end of the
year, stock is worth $7000. Joey was paid dividend
of $ 200. Calculate the total rate return received by
Joey.

SOLUTION:
R= (7000-5000)+200 x 100
5000
= 44 %
 Theweighted average of possible returns where
the weight represent the probabilities of
occurrence.
EXAMPLE:
Suppose, if you knew a given investment had a 50%
chance of earning a return of $10, a 25% chance of
earning a return of $20 and there is a 25% chance of
bearing a loss of $10. What it your expected return?
EXAMPLE:
Suppose, if you knew a given investment had a 50%
chance of earning a return of $10, a 25% chance of
earning a return of $20 and there is a 25% chance of
bearing a loss of $10. What it your expected return?

SOLUTION:
Return (Ri) Probabilities (Pi) (Ri)(Pi)
10 .50 5
20 .25 5
-10 .25 -2.5
TOTAL 7.5
 Standard Deviation
 measures risk or dispersion of a variable
 measures total risk
 large standard deviation indicates greater variability, or high
risk.
EXAMPLE:

OUTCOMES/ RETURN Probability Stock A Stock B

Outcome 1 .25 13 7

Outcome 2 .50 15 15

Outcome 3 .25 17 23
EXAMPLE: OUTCOMES/RETURN Probability Stock A Stock B

Outcome 1 .25 13 7
Outcome 2 .50 15 15

SOLUTION Outcome 3 .25 17 23

For Stock A Expected

Stock A Probability Return Variance
(Ri-R)2
(Ri) (Pi) X*P(X) (Ri-R)2 *Pi

13 .25 3.25 4 1

15 .50 7.50 0 0
S.D=√2

17 .25 4.25 4 1 S.D=1.41

TOTAL 1.00 15.00 2
EXAMPLE: OUTCOMES/RETURN Probability Stock A Stock B

Outcome 1 .25 13 7
Outcome 2 .50 15 15

SOLUTION Outcome 3 .25 17 23

For Stock B Expected

Stock B Probability Return Variance
(Ri-R)2
(Ri) (Pi) X*P(X) (Ri-R)2 *Pi

7 .25 1.75 64 16

15 .50 7.50 0 0
S.D=√32

23 .25 5.75 64 16 S.D=5.66

TOTAL 1.00 15.00 32
 It is the ratio of the standard deviation of a
distribution to the mean of that distribution.
 It is a measure of relative risk.

CV= Standard Deviation / Expected Return

CV= Standard Deviation/Expected Return
EXAMPLE:
STOCK A STOCK B
Expected Return 15 15
Standard Deviation 1.41 5.66
CV .0943 .3771

STOCK A STOCK B
Expected Return 6% 18%
Standard Deviation 0.04 0.06
CV .67 .33
 a collection of investments or
financial assets (stocks, bonds,
cash equivalents, etc.) held by
an investor
 the purpose of having a portfolio
is to reduce risk
 a good portfolio consists of
financial assets that are not
strongly positively correlated
 Correlation
Measures the strength of relationship between two
variables(-1 to 1).

 Covariance
Statistical measure of the degree to which two
variables move together. It shows the way 2
different assets in a portfolio are expected to vary
together. (if positive-same direction,
if negative- opposite direction)
The weighted average of expected return of all the
investments constituting that portfolio.
EXAMPLE:

INVESTMENT RETURNS WEIGHTS Rp

A 25,000 10% 25% 2.5%
B 75,000 6% 75% 4.5%
TOTAL 100,000 7%
Holding a wide range of
different investments in
portfolio.
Its goal is to reduce the
risk of a portfolio.
 Invest
XYZ: Decrease
1,000,000 to of 50%
XYZ:(500,000) XYZ:500,000
XYZ

Invest 500,000 XYZ: Decrease XYZ:(250,000) XYZ: 250,000

to XYZ of 50%
ABC: 125,000 ABC:625,000
Invest 500,000 ABC: Increase 875,000
of 25% Net (125,000)
to ABC
 SYSTEMATIC RISK
-also known as market risk
-caused by external factors
-non-diversifiable risk
 SYSTEMATIC RISK

Risk due to
Market risk Scams
inflation

Risk due to
Interest rate
gov’t Monsoon
risk
policies

Natural Industrial
Political risk
calamities growth
 UNSYSTEMATIC RISK Business
-associated with a Risks

particular company or
industry Materials Financial
-caused by firm-specific or Scarcity Risks

internal factors
-diversifiable risk

Risk due to
Disputes
uncertainty
 Itstates the relationship between systematic risk
and expected return for assets.
 States that investors demand additional return
(risk premium)when asked to take additional risk

Required Return (R)= Rf+(Rm-Rf)β

R= Rf+(Rm-Rf)β

 BETA(β)
-index of systematic risk
-measures the sensitivity of a stock’s return to changes in return on
the market portfolio
-overall market’s beta is 1
 R= Rf+(Rm-Rf)β

EXAMPLE:
SECURITY A SECURITY B
Risk Free Rate (Rf) 6% 6%
Market Rate (Rm) 12% 12%
Beta (β) 1.25 1.6

R=6+(12-6)*1.25 R=6+(12-6)*1.6
=13.5 % =15.6 %
The greater the value of beta,
the greater the systematic risk,
the greater the rate of return.
Thank you for listening!