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  • Risk & Return

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    Asad Ali
    29 просмотров12 страниц
    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night

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    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night

    Авторское право:

    Attribution Non-Commercial (BY-NC)
    Скачайте в формате PPTX, PDF, TXT или читайте онлайн в Scribd
    Отметить как неприемлемый контент
    29 просмотров12 страниц

    Risk & Return

    Загружено:

    Asad Ali
    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night

    Авторское право:

    Attribution Non-Commercial (BY-NC)
    Скачайте в формате PPTX, PDF, TXT или читайте онлайн в Scribd
    Отметить как неприемлемый контент
    из 12

    Corporate Finance

    Risk & Return

    Rates of Return: A Review

    Measuring Rate of Return

    The total return on an investment is made up of:

    Income (dividend or interest payments). Capital gains (or losses).

    Percentage Return = Capital Gain + Dividend Initial share Price

    Rates of Return: A Review

    Capital Gain Yield =


    Dividend Yield =

    Capital Gain Initial Share Price

    Dividend Initial Share Price

    1 nominal rate 1 real rate = 1 inflation rate

    Rates of Return: A Review

    An Example:

    A Canadian Pacific Railway (CP) share had a value of $61.40 at the beginning of 2007. By the end of the year, the price went up to $64.22. In addition, during the year, CP paid a $0.90 dividend per share. % return = Capital gain+dividend/initial share price (64.22 61.40) + 0.90 = 6.06% 61.40 Dividend yield = 0.90/61.40 = 1.47% Capital gain yield = 2.82/61.40 = 4.59% Total return= 1.47% + 4.59% = 6.06%

    Rates of Return: A Review

    Total return= 1.47% + 4.59% = 6.06%


    This is the nominal return (how much more money you will have at the end of year if invested today) To convert from nominal return to real return with inflation of 4.1% (to find how much more you will be able to buy with your money at the end of year) 1+real rate of return=1+0.0606/1+0.04 real rate of return=1.019-1= 1.98%

    Systematic Risk & Unsystematic Risk


    Systematic Risk

    Market Risk Interest Rate Risk Purchasing Power Risk

    Unsystematic Risk

    Business Risk Financial Risk

    Financial Risk
    Assigning Risk Allowances (Premiums)

    R= i + p + b + f + m + o
    Where: i = real interest rate (riskless rate) P = purchasing power risk allowance B = business risk allowance F = financial risk allowance M = market risk allowance O = allowance for other risks

    Return & Probability


    Return 7
    8 9 10 11 12 13

    Likelihood 1 chance in 20
    2 chances in 20 4 chances in 20 6 chances in 20 4 chances in 20 2 chances in 20 1 chance in 20

    Starting Predictions Scientifically


    Return (1) Probability (2) (1) X (2)

    7 8 9
    10 11 12 13

    .05 .10 .20


    .30 .20 .10 .05

    .35

    Variance & Standard Deviation


    Stock (1)
    Return Expected Return 7 -10 = 3 8 -10 = 2 9-10 = -1 10-10 = 0 9-10 = -1 10-10 = 0 .30 .40

    A (3)
    Probability

    Stock (4)
    (2) X (3)

    B (7)
    Probability

    (2)
    Difference Squared

    (5)
    Return Expected Return

    (6)
    Difference Squared

    (8)
    (6) X (7)

    11-10 = 1
    12-10 = 2 13-10 = 3 1.00 Variance S.D. 2.10 2.10 1.45

    11-10 = 1

    .30

    1.00

    .60 .60 .77

    Risk In a Contemporary Mode


    Total Risk = Diversifiable risk + Non diversifiable
    Risk

    Diversifiable Risk = You can control Non Diversifiable Risk = You cannot control

    Thank you

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