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INSTITUTE OF ECONOMICS & FINANCE, JHANSI
PRESENTATION
ON
RISK & RETURN
SUBIMITTED TO SUBIMITTED
BYMIS RADIKA CHAUDHARY ANJALISHUKLA
(LECTRUR) MBA( FM)3RD SEM
ROLL NO. 6
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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
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Risk
Systematic risk
Market risk
Interest rate
Risk
Purchasing
Power Risk
Unsystematic risk
Business Risk
Financial Risk
Default Risk/ Credit
Risk
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Systematic Risk: - The risk which arenot controllable.
Unsystematic risk:-The risk which are
controllable.
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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
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Risk Risk
Systematic Risk unsystematic
Risk
No. of the securities No. of the securities
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Return
The total income
received duringthe holding
period
� Return Component
Periodic cashreceipts( internet/
dividend)
Capital
gain/loss(change inthe price of the
assets)
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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
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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%
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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 ()
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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
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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
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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
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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
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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
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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
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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
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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
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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