RISK AND THE REQUIRED

RATE OF RETURN
Christopher M. Ataza
Glenah Marie A. Gonzales
Renz Gellie L. Villarin
RISK AND RETURN
FUNDAMENTALS
Christopher M. Ataza
 INTRODUCTION:
1. Why risk and return is an important concept in
finance?
- It is necessary to optimize returns, rather than just
investing randomly.
2. What is risk and return analysis?
- In investing, it is essential to evaluate the
performance of the stock, the company and the market.
3. How are risk and return related?
- Financial risk and return has a direct correlation.
RISK
- Is defined as the probability of
losing an amount by an investment
over the given period of time.

• For example:
An investor own shares of
stock in a high risk company and the
company goes bankrupt they likely
lose all their investment.
RETURN
- Is usually presented as a percentage relative to the
original investment over given period of time.
For example:
Assume that an initial investment of P 100.00 that grows
to P 120.00 in one year.
1. Nominal Rate of Return = (120/100)-1 = 20%
*Let us assume that the inflation rate during this one
year period was 3%.
2. Real Rates of Return = 20% - 3% = 17%
RISK AND RETURN IN FINANCIAL
MANAGEMENT
THE RELATIONSHIP BETWEEN THE
RISK AND RETURN
DISCUSSION:
RISK AND RETURN: TREND
ANALYSIS
 CONCLUSION:
• Understanding risk and return fundamentals is
essential for making informed investment decisions,
you can build a portfolio that meets your investment
goals while minimizing risk.

THANK YOU!
RISK OF A SINGLE ASSETS

GLEN GONZALES
 Risk of a Single Asset
Standalone risk is the risk associated
with a single aspect of a company or a
specific asset. Standalone risk cannot be
mitigated through diversification. Total
beta gauges the volatility of a specific
asset on a standalone basis.
“The higher the risk that you take,
The higher return you received”
Risk of Single Asset
Measurement

Which is the most

riskier in this table?
Risk of Single Asset
Measurement

Investment B is the
most Riskier than
Investment A
 Risk of Single Asset
Probability Distribution
 Risk of Single Asset
Probability Distribution
Based on the statement, what
is your analysis?
RISK OF A
PORTFOLIO
RENZ GELLIE VILLARIN
What is a Investment Portfolio?
A portfolio is the total collection
of all investments held by an
individual or institution,
including stocks, bonds,
real estate, options, futures, and
alternative investments, such as
gold.
 Portfolio Risk
Portfolio risk is a term used to
describe the potential loss of
value or decline in the
performance of an investment
portfolio due to various factors,
including market volatility,
credit defaults, interest rate
changes, and currency
fluctuations.
Different Types of Portfolio Risk
Systematic Portfolio Risk (non-diversifiable risk,
non-controllable)
This type of risk comes from
macroeconomic factors like inflation and
changing economic conditions that affect all
the securities in your portfolio and are out of
your control.
UnSystematic Portfolio Risk
(diversifiable risk)
Unsystematic risks, also called specific risks,
are uncertainties of an investment within a
particular firm or industry.
 Portfolio Return
Portfolio return can be
defined as the sum of the
product of investment returns
earned on the individual asset
with the weight class of that
individual asset in the entire
Where ∑ni=1 wi = 1
portfolio. It represents a return
on the portfolio and just not on ● w is the weight of each asset
an individual asset. ● r is the return of an asset
 Example Computation
Consider ABC Ltd, an
asset management company
, has invested in 2 different
assets along with their
return earned last year. You
are required to earn a
portfolio return.
 Expected Return vs. Required Return
Expected return is the expected
holding-period return for a stock in the
future based on expected dividend yield
and the expected price appreciation
return. Required return is the minimum
level of expected return that an investor
requires over a specified period of time,
given the asset's riskiness.
 The Capital Asset Pricing Model (CAPM)
Also called Security Market Line (SML)

The Capital Asset Pricing Model (CAPM) describes the

relationship between systematic risk, or the general perils of
investing, and expected return for assets, particularly stocks.It
is a finance model that establishes a linear relationship between
the required return on an investment and risk.

The CAPM is the best-known and most-widely used

equilibrium model of the risk/return (systematic risk/return)
relation.
 CAPM Formula and Calculation

Where:

Ra = Expected return on a security

Rrf = Risk-free rate -(certain securities (stocks or bonds) have no risks)
Ba = Beta of the security-the beta of a stock, asset, or investment measures how risky it is, index of non-
diversifiable
Rm = Expected return of the market-the average amount investors can expect to make from investments in the
market as a whole, based on historical data
 CAPM Example – Calculation of
Expected Return
Here is an example to calculate the required rate of return for an investor to invest in a
company called XY Limited which is a food processing company. Let us assume the beta value
is 1.30. The risk free rate is 5%. The whole market return is 7%.

Risk Free Rate 5% Risk Free Rate

Beta 1.3 Beta

Required Rate of Return is calculated using the formula given below Required Rate of Return
= Risk Free Rate + Beta * (Whole Market Return - Risk Free Rate)

Required Rate of Return 7.6% Required Rate of Return 7.6%

"Given a 10% chance of a 100 times payoff,
you should take that bet every time."

— Jeff Bezos
Fin.