investment – risk & return

Risk & return

Darr ke aage Jeet Hai!!!

Return

• Literal Meaning – “Give Back”

• Financial Literacy – “Give Back with Profits”

Calculation

• Single Period

• Multi Period

• Compounded Return

Ex – Post & Ex - Ante

• Experienced Incomes – Dividends

• Capital Appreciation Experienced – Stock

• Expected Incomes – Dividends

• Capital Appreciation Expected - Stocks

Portfolio Return

• Weighted Average Return

Stock Price as on 01-04-XX

Price as on 31-03-X1

Yearly Dividend

Rate of Return (%)

X 20 30 2 ??

Y 30 40 3 ??

Z 50 60 5 ??

Portfolio of (X,Y & Z)

100 130 10 ???

AnalyzeStock 01 02 03 04 05

Sterlite 30% 28% 34% 32% 31%

Bauxite 26% 13% 48% 11% 57%

• Which one would you pick?

Risk

• Deviation from that of the Expectation• Uncertainty - Variation in Returns• Standard Deviation & Variance is the common

measure in Finance

Standard Deviation

• What is this?• What are the uses?• By –Heart the formulae.

Co-Relation

• Relationship – Of the Movement– Of the Style

• What is the use– Learn the Pattern– Determine the Relationship factor

Portfolio Risk

• Benefits of a Portfolio ? - Assignment

• Portfolio Risk of Sterlite & Bauxite• 40% in Sterlite & 60% in Bauxite

Expected Return on

Sterlite

Expected Return on

Bauxite

Std Dev of Sterlite

Std Dev of Bauxite

Coefficient Co-relation

20% 30% 10% 16% -1 , 0.5 , +1

RISK

Company Specific

Market Specific

Company Specific

• Sector Specific– Regulation & Legislation– Cartels , Guilds

• Company Specific– Management– Capital Structure– Performance

Market Specific

• “Follow the Economy, For the Stocks do the same” – Warren Buffet

• Every Stock would have a co-variance with the market, hence the existence of Market Risk.

• This Risk cannot be avoided. They are like kink in the Thermometer

Non – Systematic Risk

Systematic Risk

Stan

dard

Dev

iatio

n of

Por

tfolio

Ret

urn

%

Number of Securities

B eeeeeeee T aaaaaaaaaa

• The Unsystematic risk can be diversified but the Systematic one?

• We cannot avoid the Systematic Risk by diversification, rather Minimize them.

• Thus we use Beta, Which is formed from the Equation

• Y = a + bx + e

• Beta = Covariance ( Stock & Market )

Variance of The Market

• Substitution of the Formulae’s can help you learn more of the Relationships

• Egs, Lower the Co – Relation between Market & Stock, Lower will be Beta & Vice Versa.

Risk Measurement

• Systematic Risk– BETA Square * Variance of the Market

• Unsystematic Risk– Variance of the Stock - Systematic Risk