anjali shukla pop

8/7/2019 anjali shukla pop

http://slidepdf.com/reader/full/anjali-shukla-pop 1/19

INSTITUTE OF ECONOMICS & FINANCE, JHANSI

PRESENTATION

ON

RISK & RETURN

SUBIMITTED TO SUBIMITTED

BYMIS RADIKA CHAUDHARY ANJALISHUKLA

(LECTRUR) MBA( FM)3RD SEM

ROLL NO. 6



RISK

Risk is the possibility of the lossinjuring. Risk means loss,

uncertainty of return, uncertainty

of required rate of return or

variability of return 0r risk is also

known as standard deviation &mathematically represented as



Risk

Systematic risk

Market risk

Interest rate

Risk

Purchasing

Power Risk

Unsystematic risk

Business Risk

Financial Risk

Default Risk/ Credit

Risk



Systematic Risk: - The risk which arenot controllable.

Unsystematic risk:-The risk which are

controllable.



Comparision of Business Risk

Business Risk Inter nal Business Risk Exter nal

� Fluctuation in sale

� Fixed cost

� Single product

� Research &Development

� Management

� Social

� Legal

� Technical

� Environmental� political



Risk Risk

Systematic Risk unsystematic

Risk

No. of the securities No. of the securities



Return

The total income

received duringthe holding

period

� Return Component

Periodic cashreceipts( internet/

dividend)

Capital

gain/loss(change inthe price of the

assets)



Calculation of the total return

� Total return= D/P0 + (P1 ± P0 )/P0

� Where

D- Dividend /Income P1- price at the end of the year

P0 ± price at the beginning of the year

D/P0- represented dividend yield (P1- P0)/P0- represented capital gain/loss



Q- The share price of the health care on Feb.

20th 2009 was Rs. 401 & price on oct 26th

2010 was Rs. 480 .dividend received was Rs.35 then the rate of return be calculated is as

follows?

� Rate of return = D/ P0 + (P1- P0 )/P0

= 35/401 + (480 ± 401 )/401

= 0.2842

= 28.42%



There is positive relationship amount of the riskassume & amount of the expected return if grater the risk larger the excepted return & larger chances of the loss.Risk premium Market line

= (Rm ± Rf ) Equity share

Preference share

Fixed deposit of the company

Unsecured loan

DebentureMortgage loan

Government security

Rf

Risk ()



Risk & Return on single assets in simple term

Q-The rate of return of the equity share of the Tata motors Ltd. For the

past 6 years are as follows.

Calculate the excepted return and risk?

Sol. Calculation of the excepted return

ER = ( R1 + R2 +-------+ Rn )/ n

= (12+18-6+20+22+24)/6

= 15%

Calculation of the risk

Risk () = ¥(�(R - R )2/ n or = ¥(�(R - R )2*Pi ( when the probability be given)

Risk () = ¥614/6 = 10.12%

Year 2003 2004 2005 2006 2007 2008

Rate of return 12 18 -6 20 22 24

R 12 18 -6 20 22 24

R 15 15 15 15 15 15

(R- R) -3 -3 -21 5 7 9

(R- R)2 9 9 441 25 49 81



There are some theories are

represented the relationship of risk

and return� Selection of the securities according to

the Markowitz model

� Selection of the securities according to

the Sharpe index model

� Calculation of the risk and return on the

basis of the arbitrage pricing model.

� Calculation of the risk and return of onthe basis of the capital assets pricing

model



Calculate the rate of return when 100% invested in

securities X & when 100% invested on the security

Y & what is the rate of the return when we divided X& Y in the ratio which are as follows which

represented our portfolio

X:Y =50:50, X:Y=80:20 and X:Y= 20:80 calculated

it ?

State of

economy

Probabilit

y

Retur n of security

X

Retur n of the

securities Y

A .1 -8 14

B .2 10 -4

C .4 8 6

D .2 5 15

E .1 -4 20



Based on Markowitz model-

Calculation is as follows

State of

econom

y

Pi RX RY (ER)x=(RX *

Pi)

(ER)Y=(RY *

Pi)

RXY = (RX *

Pi)+(RY * Pi)

RXY *Pi

A .1 -8 14 -.8 1.4 3 0.3

B .2 10 -4 2 -.8 3 0.6

C .4 8 6 3.2 2.4 7 2.8

D .2 5 15 1 3.0 10 2.0

E .1 -4 20 -.4 2.0 8 0.8

TOTAL �(ER

)x

= 5 �(ER

)y

= 8 �RXY=6.5



Conclusion

When we investedX:Y=80:20RXY = W((ER)x + (1- W)(ER)YW= .20 & (1-W)=.80RXY = (.20*5)+(.80*8)=7.4%

When we investedX:Y=20:80RXY = W((ER)x + (1- W)(ER)YW= .80 & (1-W)=.20

RXY = (.80*5)+(.20*8)=5.6%

Security investment Return

X 100% 5%

Y 100% 8%

X:Y 50:50% 6.5%

X:Y 80:20% 5.6%

X:Y 20:80% 7.4%

By the diversification we getdifferent return



Calculate the risk of the given security A & B

after this calculate portfolio AB risk and also

calculate the rate of return and compare

between them?

State of

economy

Probab

ility

Retur n of

security A

Retur n of the

securities B

Retur n on the

port folio AB

A .2 15 -5 5

B .2 35 5 20

C .2 -5 15 5

D .2 25 35 30

E .2 5 25 15



Solution of the risk and return

SOE Pi RA RB

(ER)A=(RA*

Pi)

(ER)B=(RB *

Pi)

Portfolio

retur n

EAB

=RAB*Pi

A .2 15 -5 3 -1 5 1

B .2 35 5 7 1 20 4C .2 -5 1

5

-1 3 5 1

D .2 25 3

5

5 7 30 6

E .2 5 25

1 5 15 3

TOT

AL

�(ER)A=15 �(ER)B=15 �EAB=15



Conclusion

Risk for A

(A)2 =.2*(15-15)2+.2*(35-15)2+.2*(-5-15)2+.2*(25-15)2+.2*(5-15)2

= 200

A =¥(200) =14.14 %

Risk for B

(B)2 =.2*(-5-15)2+.2*(5-15)2+.2*(15-15)2+.2*(35-15)2+.2*(25-15)2

= 200

B =¥(200) =14.14 %

Risk for AB

(AB)2 =.2*(5-15)2+.2*(20-15)2+.2*(5-15)2+.2*(30-15)2+.2*(15-15)2

= 90B =¥(90) =9.49 %

� Security risk return

� A 14.14% 15

� B 14.14% 15

� AB 9.49% 15

We can say that if we areinvesting in the singlesecurity return be samebut risk also same if wediversified our portfoliothere are no any changesoccurred in the return of

the security but risk bereduced in the comparisonof the single investment



conclusion

� It is necessary to keep in mind the riskreturn trade off because if you do notkeep in mind than you bear loss. Before

investing in the securities you have keepin mind how much risk is involved andwhat is the excepted return be comefrom there investment. the combination

of the risk and return can not be ignoredbut can be reduced by the proper management by the various method

Documents

anjali shukla pop