7/21/2019 Risk and Return - Lecture 1
1/14
Powerpoint Templates
Page 1Powerpoint Templates
Financial Mangement (FIN306)
Risk and Return
Chapter 8
Dr. Ishtia !hmad
Department Of Banking and Finance
http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
2/14
Powerpoint Templates
Page 2
What is Return
What is Risk
Relationship Between Risk andReturn
How to calculate Return
Historical Return and Risk A Case
Study
Microsoft Vs. Walreens
Lecture Outline
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
3/14
Powerpoint Templates
Page 3
The gain or loss of a security in a particularperiod, the return consists of the income and thecapital gains relative on an investment. It isusually quoted as a percentage.
Performance analysis of an investment requiresinvestors to measure returns over time.
Return and risk being intricately related, returnmeasurement helps in the understanding of
investment risk.
(Financial) Return
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
4/14
Powerpoint Templates
Page 4
ncertainty of outcome !!!
Risk can be defined as a measure of the uncertainty in aset of potential outcomes for an event in which there is a
chance of some loss.
Risky " Potential for loss e#ists
It is important to measure and analy$e the riskpotential of an investment, so as to make aninformed decision.
(Financial) Risk
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
5/14
Powerpoint Templates
Page 5
Investments must be analy$ed interms of, both, their return potential aswell as their riskiness or variability.
%istorically, its been proven thathigher returns are accompanied by
higher risks.
&'(
The
Risk-and-Return Trade-off
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
6/14
Powerpoint Templates
Page 6
Dollar Profits and Percentage Returns
)ollar Profit or *oss " +nding value )istributions ' -riginal ost
Rate of return " )ollar Profit or *oss
-riginal ost
Holding Period Return (HPR) " Profit/*oss ost
HPR " +nding price )istributions ' 0eginning price0eginning price
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
7/14
Powerpoint Templates Page 7
alculating dollar and percentage returns!
1oe bought some gold coins for 23,444 and sold them 5 months later for 23,644.
1ane on the other hand bought 344 shares of a stock for 234 and sold those 6 years later for236 per share after receiving 24.(4 per share as dividends for the year.
alculate the dollar profit and percent return earned by each investor over their respectiveholding periods.
Solution:
Joes Dollar Profit !nding "alue # $riginal cost
" 23,644 ' 23,444 " 26442644
Joes HPR Dollar %rofit & $riginal cost
" 2644/23,444 " 647647
Janes Dollar Profit '!nding "alue (Distri)utions* + $riginal ,ost " 236 # 344 24.(4 # 344 ' 234 # 344
" 823,644 2(49 ' 23,444
" 26(4.4426(4.44
1ane:s HPR " 26(4.44/23,444 " 6(76(7
Dollar Profits and Percentage Returns +#ample
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
8/14
Powerpoint Templates Page -
,alculating .PR and !.R/
1oe bought some gold coins for 23,444 and sold them 5 months later for 23,644.1ane on the other hand bought 344 shares of a stock for 234 and sold those 6 years later for 236 per share afterreceiving 24.(4 per share as dividends for the year.
alculate the dollar profit and percent return earned by each investor over their respective holding periods.
Solution:
Joes 0PR " 647647;PR" %PR/n" 4.64/4.3/n '3" 834.649> 3/4.3/n '3 " 834.6(9> @ '3 "+;R " 83%PR9>3/n '3 " 834.6(9> @ '3 "
33.&733.&7
Returns at sae ootings 'annualied* +#ample
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
9/14
Powerpoint Templates Page
Aicrosoft Bs. Calgreens
Rate of return for both companies are given from644? to 6436
0ased on the Risk and return analysis in which
stock you will like to invest!!!!/
Historical Return and Risk A Case Study
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
10/14
Powerpoint Templates Page 1
Bariance and standard deviation are measures ofdispersion
%elps researchers determine how spread out orclustered together a set of numbers or outcomes is
around their mean or average value. The larger the variance, the greater is the variability and
hence the riskiness of a set of values.
ariance and Standard De"iation as a easure of Ris8
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
11/14
Powerpoint Templates Page 11
Aicrosoft Bs. Calgreens
Historical Return and Risk A Case Study cont.
"ear
!"#!
!"##
!"#"
!""$
!""%
!""&
#um
!$erage
%ercent
Micr&s&'t allgreen
%.'( #).&(
*'.+( #+.$(
*+.+( *#$.'(
)$.)( )".$(
*''.#( *,'.#(
!".+( *#+.,(
33.* +3.,*
-.-* .3*
Decimal
Micr&s&'t allgreen
"."%' ".#)&
*"."'+ ".#+$
*"."++ *".#$'
".)$) ".)"$
*".''# *".,'#
".!"+ *".#+,
0.33 0.+3,
-.-3* .8*
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
12/14
Powerpoint Templates Page 12
"ear
!"#!
!"##
!"#"
!""$
!""%
!""&
Historical Return and Risk A Case Study cont.
Micr&s&'t
Return Minus !$erageDe$iati&
n
De$iati&n#uared%.'(
*'.+(
*+.+(
)$.)(
*''.#(
!".+(
*
*
*
*
*
*
).)(
).)(
).)(
).)(
).)(
).)(
!.$(
*#".#(
*#!.#(
)'."(
*'$.+(
#).#(
%.'(
#"!."(
#'+.'(
!$#+."(
!'+".!(
!!%."(
allgreen
Return Minus!$erag
eDe$iati
&n
De$iati&n#uared#).&(
#+.$(
*#$.'(
)".$(
*,'.#(
*#+.,(
*
*
*
*
*
*
.3*
.3*
.3*
.3*
.3*
.3*
#,.'(
#'.+(
*!#.&(
'%.+(
*,+.'(
*#%.+(
#%"."(
!#,.+(
'&".!(
!,+,.+(
#,!,.&(
,').,(
#um-86+*
s/86.-* s
1ariance2#um(n4+)
-86+*(64+)
++,*
/86*(64+)
,*
#tandardDe$iati&n #5R ($ariance)
3/* 3+*
C&e7cient &'$ariance 3/-.- 3+.3
6. +3.-
http://www.powerpointstyles.com/http://www.powerpointstyles.com/7/21/2019 Risk and Return - Lecture 1
13/14
Powerpoint Templates Page 13
Investment rule number 1:
If faced with 2 investment choices having the same expected returns,
select the one with the lower expected risk.
Investment rule number 2:
If two investment choices have similar risk profiles, select the one with
the higher expected return.
To a9iie return and iniie ris8 , it would be ideal to select an investment that has
a higher e#pected return and a lower e#pected risk than the other alternatives.
Realistically, higher e#pected returns are accompanied by greater variances and thechoice is not that clear cut. The in"estors tolerance for and attitude
toards ris8 atters;
e
7/21/2019 Risk and Return - Lecture 1
14/14
Powerpoint Templates Page 14
e