sapm1
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RISK & RETURN
Akshay Samant
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Securities to be held Funds to be allocatedPortfolio Analysis, Selection and Management
Investors are concerned with two inherent
properties of securities:-Risk-Return
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Total Return: C + (PE - PB)R = PB
R = total return over the periodC = cash payment received during the
period
PE = ending price of the investment
PB = beginning price of the investment
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Return Relative C + P E = PB
Put differently return relative = 1 + total return
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Cumulative Wealth Index Measures the level of wealthCWI n = WIO (1+R1) (1+R2)…….(1+R n)CWI n = Cumulative wealth index at the end of
the year WIO = beginning index value which is typically rupee oneR i = total return for year i (i = 1,2,……,n)
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Arithmetic mean: It is the mean of a series of total returns.
Geometric mean: It is the nth root of the product resulting from multiplying a series of return relatives minus one.
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It refers to the possibility that the actual outcome of an investment will differ from the expected outcome.
It is variability or dispersion. It is technically different from uncertainty.
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Sources of systematic risk Sources of unsystematic risk
Types of Risk: Systematic risk Unsystematic risk
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Types of systematic risk: - market risk - interest rate risk - purchasing power risk
Types of unsystematic risk - business risk - financial risk
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Diversifiable risk is unsystematic risk Non-diversifiable risk is systematic risk
Total risk = Diversifiable risk + Non- diversifiable risk
Beta measures the non-diversifiable risk.
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Variance and Standard Deviation It is commonly used measure of risk in
finance.
Expected Return and Risk using Probability Distribution:
Expected rate of return Standard deviation of return