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RISK & RETURN
Akshay Samant
Securities to be held Funds to be allocatedPortfolio Analysis, Selection and Management
Investors are concerned with two inherent
properties of securities:-Risk-Return
Total Return: C + (PE - PB)R = PB
R = total return over the periodC = cash payment received during the
period
PE = ending price of the investment
PB = beginning price of the investment
Return Relative C + P E = PB
Put differently return relative = 1 + total return
Cumulative Wealth Index Measures the level of wealthCWI n = WIO (1+R1) (1+R2)…….(1+R n)CWI n = Cumulative wealth index at the end of
the year WIO = beginning index value which is typically rupee oneR i = total return for year i (i = 1,2,……,n)
Arithmetic mean: It is the mean of a series of total returns.
Geometric mean: It is the nth root of the product resulting from multiplying a series of return relatives minus one.
It refers to the possibility that the actual outcome of an investment will differ from the expected outcome.
It is variability or dispersion. It is technically different from uncertainty.
Sources of systematic risk Sources of unsystematic risk
Types of Risk: Systematic risk Unsystematic risk
Types of systematic risk: - market risk - interest rate risk - purchasing power risk
Types of unsystematic risk - business risk - financial risk
Diversifiable risk is unsystematic risk Non-diversifiable risk is systematic risk
Total risk = Diversifiable risk + Non- diversifiable risk
Beta measures the non-diversifiable risk.
Variance and Standard Deviation It is commonly used measure of risk in
finance.
Expected Return and Risk using Probability Distribution:
Expected rate of return Standard deviation of return