risk, return and investment

7/30/2019 Risk, Return and Investment

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RISK, RETURN AND

INVESTMENTANURANI.M

S3MBAMGT1105409




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RISK

▼ Risk refers to the possibility of incurring a

loss in a financial transaction.

▼ The possibility of variation of actual return

from expected return is termed as risk.

▼ In terms of variability of return “Risk is the

potential for variability of return.”




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An investment whose returns are fairly stable

- low risk investment. Eg: Govt. securities

An investment whose returns fluctuate significantly

- high risk investment. Eg: equity shares




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ELEMENTS OF RISK

▼ Factors which produce variation in the returns from

an investment constitute the elements of risk.

The elements of risk may be broadly classified in to

two groups. Systematic risk

Unsystematic risk

Total risk = Systematic risk+ Unsystematic risk




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SYSTEMATIC RISK

Comprises factors that are external to a company and

affect a large number of securities simultaneously.

They are uncontrollable in nature.The impact of economic, political and social changes is

system-wide and that portion of total variability in

security returns caused by such system wide

factors is referred to as systematic risk.




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Systematic risk

Interest rate risk Market risk purchasing power

Interest rate risk

Affects debt securities like bonds and debentures.

The variation in bond prices caused due to the variation in the

market interest rates is known as interest rate risk.

Market risk

Affect shares

The variation in risk due to the volatility of the stock market.


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▼ Purchasing power risk

Variation in investor returns caused by inflation is

known as purchasing power risk.

UNSYSTEMATIC RISK

The return from a security sometimes vary because of certain factors affecting only the company issuing

such securities. Examples are raw material

scarcity, labour strike, management inefficiency.

When variability of returns occurs because of such

firm- specific factors , it is known as unsystematic

risk.


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Unsystematic risk

Business risk Financial risk

Business risk

Operating environment of the company-source

Business risk is the variability in operating

income caused by the operating conditions of

the company.

Financial risk

The variability in ESP due to the presence

of debt in the capital structure of the company.



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MEASUREMENT OF RISK

Forecasted dividend + Forecasted end of the

period stock price

R = 1

Initial investment

Expected return

The expected return of an investment is the probability

weighted average of all the possible returns.

x = ∑ X p(X ) n

i=1i i



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X = Expected return

X = Possible returns

P(x ) = Related probabilities

The most possible measurement of risk is the

variance or standard deviation of the

probability distribution of possible returns.

σ= ∑[(X-X) p(X )]

i

i

n

i=1 i

2

i

2



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INVESTMENT

Investment is an activity that is engaged in by

people who have savings, or in other wordsinvestments are made from savings.

It may mean many things to many person.

If one person has advanced some money toanother- He expects money along with interest.

Another person may have purchased one

kilogram of gold for the purpose of price

appreciation. One may purchase insurance plan for various

benefit it promises in future.



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Definition

Investment may be defined as

“a commitment of funds made in the

expectation of some positive rate of rate of return.”



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CHARECTERISTICS OF INVESTMENT

Return

Investments are made with the primary

objective of deriving a return.

Risk

The risk may related to loss of capital, delay inrepayment of capital, non payment of interest,

or variability of returns.

Safety

The safety of an investment implies the

certainty of return of capital without loss of

money or time.




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Liquidity

An investment which is easily saleable or

marketable with out loss of money and

time is said to possess liquidity. Someinvestments like company deposits, bank

deposits, P.O deposits, NSC, NSS etc are

not marketable.

Equity shares of companies listed on stock

exchanges are easily marketable through

the stock exchanges.




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OBJECTIVES OF INVESTMENT

1. Maximization of return

2. Minimization of risk

3. Hedge against inflation –

Our savingskept as cash not only barren because

they do not anything, and also losses its

value to the extent of rice in prices.

Savings are invested to provide a hedgeor protection against inflation.




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TYPES OF INVESTORS

Investors may be individuals and institutions.

Individual investors

Individual investors are larger in number but their investable resources are

comparatively smaller. They generally lack

the skill to carry out extensive evaluation

and analysis before investing.




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Institutional investors

Institutional investors, on the other

hand are the organizations with surplus

funds who engage in investment

activities. Mutual funds, investmentcompanies, banking and non banking

companies, insurance corporations,etc

are organisations with large amounts of

surplus funds to be invested in various

profitable avenues.




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INVESTMENT AVENUES

The investor has to choose proper avenues from

among them depending on his preference ,

need and ability to assume risk. The investment

avenues can be broadly categorized under the

following under following heads.

1. Corporate securities

2. Deposits in banks and non-banking companies

3. UTI and other mutual fund schemes

4. Post office deposits and certificate

5. Life insurance policies




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6. Provident fund schemes

7.Government and semi government securities

risk, return and investment

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