RISK

MEANING
A probability or threat of damage, injury, liability, loss, or
any other negative occurrence that is caused by external
or internal reason , and that may be avoided through
preventative action.
TYPES OF RISK
Systematic Risk - Systematic risk influences a large number of
assets. A significant political event, for example, could affect
several of the assets in your portfolio. It is virtually impossible
to protect yourself against this type of risk.
Unsystematic Risk - Unsystematic risk is sometimes referred
to as "specific risk". This kind of risk affects a very small
number of assets. An example is news that affects a specific
stock such as a sudden strike by employees.
Credit or Default Risk - Credit risk is the risk that a
company or individual will be unable to pay the
contractual interest or principal on its debt obligations.

Country Risk - Country risk refers to the risk that a

country won't be able to honor its financial commitments.
Foreign-Exchange Risk - When investing in foreign
countries you must consider the fact that currency
exchange rates can change the price of the asset as well.

Interest Rate Risk - Interest rate risk is the risk that an

investment's value will change as a result of a change in
interest rates.
Political Risk - Political risk represents the financial risk
that a country's government will suddenly change its
policies.

Market Risk - This is the most familiar of all risks. Also

referred to as volatility, market risk is the day-to-day
fluctuations in a stock's price.
RETURN :
A return is the gain or loss of a security in a particular
period. The return consists of the income and the capital
gains relative on an investment, and it is usually quoted as
a percentage.
TYPES:
Return on Investment: is calculated by dividing the cost
of the investment by the difference between the cost of
the investment and the gain on the investment.
Return on Equity : Return on equity, or ROE, is another
commonly used measure of return used by those
analyzing business performance. In this case, a company’s
net income is the gain or loss, and the cost is the average
of the company’s equity. ROE is used by investors
looking for a return on the company's equity capital.
Return on Assets: It is commonly used as a measure of
return by those analyzing financial stocks
PROFIT
PROFIT
Profit = TR – TC
The reward for enterprise
Profits help in the process of directing resources to alternative uses in free markets
Relating price to costs helps a firm to assess profitability in production
PROFIT
Normal Profit – the minimum amount required to keep a firm in
its current line of production
Abnormal or Supernormal profit – profit made over and above
normal profit
 Abnormal profit may exist in situations where firms have
market power
 Abnormal profits may indicate the existence of welfare losses
 Could be taxed away without altering resource allocation
PROFIT
Sub-normal Profit – profit below normal profit
 Firms may not exit the market even if sub-normal profits made if they are able to cover variable costs
 Cost of exit may be high
 Sub-normal profit may be temporary (or perceived as such!)
PROFIT
Assumption that firms aim to maximise profit
May not always hold true –
there are other objectives
Profit maximising output would be where MC = MR
PROFIT Why? If Assume
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