Risk & Return

I.K. Gunarta
Tingkat pengembalian
yang tinggi pada
umumnya memiliki
risiko yang tinggi pula
Tingkat Pengembalian

Surat-surat Pengembalian Diviasi Standar Pengembalian Premi

Berharga Nominal Rata- Pengembalian Rata-rata Riil
rata per Tahunan Risiko
Tahun
Saham perusahaan- 16,9% 32,2% 13,8% 13,1%
perusahaan kecil
Saham perusahaan- 12,2 20,5 9,1 8,4
perusahaan besar
Obligasi jangka 6,2 8,7 3,1 2,4
panjang korporasi
Obligasi jangka 5,8 9,4 2,7 2,0
panjang Pemerintah
US Treasury Bill 3,8 3,2 0,7 0,0

Finance – I.K. Gunarta 6

Tingkat Pengembalian

 Treasury Bill memiliki risiko yang paling kecil dari kelima portfolio
karena TB memiliki waktu jatuh tempo yang singkat, maka harganya
bervolatilitas lebih kecil (risiko lebih kecil) dibanding surat-surat
berharga jangka panjang lainnya.
 Perusahaan kecil yang dimaksud adalah perusahaan kecil yang
terdaftar di Bursa NY (20% dari total).
 Perusahaan kecil terlalu mengandalkan pembiayaan dari hutang.

Finance – I.K. Gunarta 7

For a Treasury security, what is
the required rate of return?
For a Treasury security, what is
the required rate of return?

Required
rate of =
return
 For a Treasury security, what is
the required rate of return?

Required Risk-free
rate of = rate of

return are essentially

Since Treasuries returnfree of
default risk, the rate of return on a
Treasury security is considered the
“risk-free” rate of return.
 For a corporate stock or bond,
what is the required rate of return?
 For a corporate stock or bond,
what is the required rate of return?

Required
rate of =
return
 For a corporate stock or bond,
what is the required rate of return?

Required Risk-free
rate of = rate of
return return
 For a corporate stock or bond,
what is the required rate of return?

Required Risk-free Risk

rate of = rate of + premium
return return

How large of a risk premium should we

require to buy a corporate security?
 Returns

 Expected Return - the return that an

investor expects to earn on an asset,
given its price, growth potential, etc.

 Required Return - the return that an

investor requires on an asset given
its risk and market interest rates.
 Expected Return

State of Probability Return

Economy (P) Orl. Utility Orl. Tech
Recession .20 4% -10%
Normal .50 10% 14%
Boom .30 14% 30%
For each firm, the expected return on the
stock is just a weighted average:
 Expected Return

State of Probability Return

Economy (P) Orl. Utility Orl. Tech
Recession .20 4% -10%
Normal .50 10% 14%
Boom .30 14% 30%
For each firm, the expected return on the
stock is just a weighted average:

k = P(k1)*k1 + P(k2)*k2 + ...+

 Expected Return

State of Probability Return

Economy (P) Orl. Utility Orl. Tech
Recession .20 4% -10%
Normal .50 10% 14%
Boom .30 14% 30%

k = P(k1)*k1 + P(k2)*k2 + ...+ P(kn)*kn

k (OU) = .2 (4%) + .5 (10%) + .3 (14%) = 10%

 Expected Return

State of Probability Return

Economy (P) Orl. Utility Orl. Tech
Recession .20 4% -10%
Normal .50 10% 14%
Boom .30 14% 30%

k = P(k1)*k1 + P(k2)*k2 + ...+ P(kn)*kn

k (OI) = .2 (-10%)+ .5 (14%) + .3 (30%) = 14%

Based only on your
expected return
calculations, which
stock would you
prefer?
Have you considered
RISK?
 What is Risk?

 The possibility that an actual return

will differ from our expected
return.
 Uncertainty in the distribution of
possible outcomes.
 What is Risk?
 Uncertainty in the distribution of
possible outcomes.
 What is Risk?
 Uncertainty in the distribution of
possible outcomes.

Company A
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
4 8 12

return
 What is Risk?
 Uncertainty in the distribution of
possible outcomes.

Company A Company B
0.5
0.2
0.45
0.18
0.4
0.16
0.35
0.14
0.3
0.12
0.25
0.1
0.2
0.08
0.15
0.06
0.1
0.04
0.05
0.02
0
0
-10 -5 0 5 15 20 25 30
10

return return
 How do We Measure Risk?
 To get a general idea of a stock’s
price variability, we could look at
the stock’s price range over the
past year.

52 weeks Yld Vol Net

Hi Lo Sym Div % PE 100s Hi Lo Close Chg
95 49
134 80 IBM .52 .5 21 143402 98 95 -3

115 40 MSFT … 29 558918 55 52 5194 -475

 How do We Measure Risk?

 A more scientific approach is to

examine the stock’s standard
deviation of returns.
 Standard deviation is a measure of
the dispersion of possible outcomes.
 The greater the standard deviation,
the greater the uncertainty, and,
therefore, the greater the risk.
 Standard Deviation

P(ki)
= 
i=1
n
(ki -
k)2
 Expected Return

State of Probability Return

Economy (P) Orl. Utility Orl. Tech
Recession .20 4% -10%
Normal .50 10% 14%
Boom .30 14% 30%
=
n
P(ki)

i=1 (ki - k)2
Orlando Utility, Inc.
=
n
P(ki)
i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
=
n
P(ki)

i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
(10% - 10%)2 (.5) = 0
=
n
P(ki)
i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
(10% - 10%)2 (.5) = 0
(14% - 10%)2 (.3) = 4.8
=
n
P(ki)
i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
(10% - 10%)2 (.5) = 0
(14% - 10%)2 (.3) = 4.8
Variance = 12
=
n
P(ki)
i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
(10% - 10%)2 (.5) = 0
(14% - 10%)2 (.3) = 4.8
Variance = 12
Stand. dev. = 12
=
=
n
P(ki)

i=1 (ki - k)2
Orlando Utility, Inc.
( 4% - 10%)2 (.2) = 7.2
(10% - 10%)2 (.5) = 0
(14% - 10%)2 (.3) = 4.8
Variance = 12
Stand. dev. = 12 = 3.46%
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) = 115.2
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) =
115.2
(14% - 14%)2 (.5) = 0
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) =
115.2
(14% - 14%)2 (.5) = 0
(30% - 14%)2 (.3) =
76.8
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) =
115.2
(14% - 14%)2 (.5) = 0
(30% - 14%)2 (.3) =
76.8
Variance = 192
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) =
115.2
(14% - 14%)2 (.5) = 0
(30% - 14%)2 (.3) =
76.8
Variance = 192
=
n
P(ki)

i=1 (ki - k)2
Orlando Technology, Inc.
(-10% - 14%)2 (.2) = 115.2
(14% - 14%)2 (.5) = 0
(30% - 14%)2 (.3) = 76.8
Variance = 192
Stand. dev. = 192 =
13.86%
 Summary

Orlando Orlando
Utility Technology

Expected Return 10% 14%

Standard Deviation 3.46% 13.86%

It depends on your tolerance for risk!

Remember, there’s a tradeoff between

risk and return.
It depends on your tolerance for risk!

Return

Risk
Remember, there’s a tradeoff between
risk and return.
It depends on your tolerance for risk!

Return

Risk
Remember, there’s a tradeoff between
risk and return.
 Portfolios

 Combining several securities

in a portfolio can actually
reduce overall risk.
 How does this work?
 Suppose we have stock A and stock B.
The returns on these stocks do not tend
to move together over time (they are
not perfectly correlated).

rate
of
return

time
 Suppose we have stock A and stock B.
The returns on these stocks do not tend
to move together over time (they are
not perfectly correlated).
kA
rate
of
return

time
 Suppose we have stock A and stock B.
The returns on these stocks do not tend
to move together over time (they are
not perfectly correlated).
kA
rate
of
return kB

time
 What has happened to the
variability of returns for the
portfolio?

kA
rate
of
return kB

time
 What has happened to the
variability of returns for the
portfolio?
kA
rate kp
of
return
kB

time
 Diversification

 Investing in more than one security

to reduce risk.
 If two stocks are perfectly positively
correlated, diversification has no
effect on risk.
 If two stocks are perfectly negatively
correlated, the portfolio is perfectly
diversified.
 If you owned a share of every stock
traded on the NYSE and NASDAQ,
would you be diversified?
YES!
 Would you have eliminated all of
your risk?
NO! Common stock portfolios
still have risk.
 Some risk can be diversified
away and some cannot.
 Market risk (systematic risk) is
nondiversifiable. This type of
risk cannot be diversified away.
 Company-unique risk
(unsystematic risk) is diversifiable.
This type of risk can be reduced
through diversification.
Market Risk (Risiko Pasar)
 Perubahan tingkat suku bunga yang tak
terduga.
 Perubahan tak terduga pada arus kas karena
perubahan tarif pajak, persaingan internasional,
dan siklus bisnis secara keseluruhan.

Finance – I.K. Gunarta 75

Risiko perusahaan (Company-Unique Risk)

 Tenaga kerja perusahaan mogok.

 Manajemen puncak sebuah perusahaan
meninggal dalam kecelakaan pesawat.
 Ledakan tangki minyak dan banjir besar pada
area produksi perusahaan.

Finance – I.K. Gunarta 76

As you add stocks to your portfolio,
company-unique risk is reduced.
 As you add stocks to your portfolio,
company-unique risk is reduced.

portfolio
risk

number of stocks
 As you add stocks to your portfolio,
company-unique risk is reduced.

portfolio
risk

Market risk
number of stocks
 As you add stocks to your portfolio,
company-unique risk is reduced.

portfolio
risk

company-
unique
risk

M
a
 Do some firms have more
market risk than others?
Yes. For example:
Interest rate changes affect all firms, but which would
be more affected:

a) Retail food chain

b) Commercial bank
 Do some firms have more
market risk than others?
Yes. For example:
Interest rate changes affect all firms, but which would
be more affected:

a) Retail food chain

b) Commercial bank
 Note
As we know, the market compensates
investors for accepting risk - but
only for market risk. Company-
unique risk can and should be
diversified away.

So - we need to be able to measure

market risk.