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Risk

The dictionary meaning of risk is the possibility of loss or injury. Any rational investor before investinghis wealth in any security. He analysis the risk associated with particular security. The actual return hegat may vary from the expected return and risk which is expected. The down side of risk is cause by

many factors. They are common to all securities all specific to a particular security. The investor ingeneral would like to analyze the risk factors and through the knowledge of a risk plans him to make aportfolio in such a manner so as to minimize risk associated with the investment.

Risk consist of two components

Systematic risk Unsystematic risk

The systematic risk is caused by the factors external to the company and controllable by the company.

The systematic risk affects the market as a whole.

In case of unsystematic risk the factors are specific, unique, and related to a particular industry or

company

Systematic risk

The systematic risk affects the entire market. The economic conditions, political situations andsociological changes affect the security market. The factors are beyond the control of the corporate and

investor. The investor can not control them. The is subdivided into

Market risk Interest risk Purchase power risk

Unsystematic risk

The unsystematic risk is peculiar to a firm or an industry. It stems from a managerial efficiency,technological change in the production process, availability of raw material, changes in the customer

preferences, and labor problems. The nature and magnitude of above mentioned factors differs fromindustry to industry and company to company. The have to be analyze separately for each industry and

firm. Broadly unsystematic risk can be classified into

Business risk Financial risk

Risk measurement

Understanding nature of risk is not adequate unless the analyst is capable of expressing it in somequantitative terms. Measurement can not be assured of cent percent accuracy because risk is caused by

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numerous factors such as social, political, economic and managerial efficiency. The statistical tools used

to quantify risk are

Standard deviation

a) A measure of dispersion of set of data from its mean, the more spread apart the higher thedeviation.

b) In finance, standard deviation is applied to annual rate of return of an investment to measurethe investment volatility (risk).

A volatile stock would have a higher standard deviation, in mutual funds standard deviation tells us howmuch the return is deviating from the expected normal return. Standard deviation can also be calculated

as a square root of variance.

Beta

Beta describes the relationship between the securities, return and index returns

Beta=1.0

One percent change in market index returns causes exactly one percent change in the security return. It

indicates that security moves in tandem with market.

Beta =+0.5

One percent change in market index return causes 0.5 percent in the security return. The security is less

volatile as compared to market

Beta=+2.0

One percent change in market index return causes two percent change in security return. The securityreturn is more volatile. When there is a decline of 10% in market returns. The security of beta 2 wouldgive negative return of 20%. The security more than one beta value will be considered as risky.

Negative beta

Negative beta value indicates that the security returns moves in opposite direction to the market return.A security of beta-1 would provide a return of 10%, if the market return declines by 10% and vice-versa.

Rate of return

The compounded annual return on a mutual scheme represents the return to investors from a schemesince the date of issue. It is calculated on NAV basis or price basis.