Risk and Return Analysis .ppt By Sumon Sheikh
Download as PPTX, PDF8 likes4,514 views
The document discusses risk and return analysis in investments, defining key concepts such as risk, return, expected return, and portfolio variance. It details various types of risks, methodologies to calculate returns on investments, covariance between assets, and the Capital Asset Pricing Model (CAPM). Additionally, it includes examples demonstrating how to compute expected returns, portfolio beta, and standard deviation.
Risk and Return Analysis .ppt By Sumon Sheikh
- 1. 1
- 2. 2
- 3. 3 Risk & Return Analysis What is Risk? Risk is the variability between the expected and actual returns. Types of Risk Interest Rate Risk Market Risk Financial Risk Liquidity Risk Foreign Exchange Risk Country Risk
- 4. 4 Risk & Return Analysis Income received on an investment plus any change in market price, usually expressed as a percent of the beginning market price of the investment What is Return? Components of Return Total Return
- 5. 5 Risk & Return Analysis Components of Return Analysis
- 6. 6 Risk & Return Analysis Suppose a stock has an initial price of $64 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $73. Compute the percentage total return. Example of Return $73
- 7. 7 Risk & Return Analysis
- 8. 8 Risk & Return Analysis Return
- 9. 9 Risk & Return Analysis Return with Probability & without Probability Quarter Probability Return (RA) Return (RB) Q1 20% 11% 9% Q2 25% -8% -7% Q3 30% 5% 5% Q4 25% 15% 17% Example of Expected Return
- 10. 10 Risk & Return Analysis Expected return (𝐑 𝐀) = 𝟏𝟏+ −𝟖 +𝟓+𝟏𝟓 𝟒 = 5.75% Expected return (𝐑 𝐁) = = 𝟗+ −𝟕 +𝟓+𝟏𝟕 𝟒 = 6% Expected return (𝐑 𝐀) = = .20×.11+.25(-.08)+ .30 ×.05+.25 ×. 𝟏𝟓 = .0545 = 5.45% Expected return (𝐑 𝑩) = = .20×.09+.25(-.07)+ .30 ×.05+.25 ×. 𝟏𝟕 = .0580 = 5.80%
- 11. 11 Risk & Return Analysis Quarter Probability Return (RA) Return (RB) Q1 20% 11% 9% Q2 25% -8% -7% Q3 30% 5% 5% Q4 25% 15% 17% Example of Variance
- 12. 12 Risk & Return Analysis Quantity Pi RA RB (RiA − 𝐑 𝐀) 𝟐 Pi(RiA − 𝐑 𝐀) 𝟐 (Ri𝐵 − 𝐑 𝑩) 𝟐 Pi(Ri𝐵 − 𝐑 𝑩) 𝟐 Q1 .20 .11 .09 .0031 .20 .0010 .20 Q2 .25 −.08 −.07 .018 .0045 .0164 .0041 Q3 .30 .05 .05 .00002 .30 .000064 .30 Q4 .25 .15 .17 .0091 .25 .0125 .0031
- 13. 13 Risk & Return Analysis
- 14. 14 Risk & Return Analysis with Probability & without Probability Covariance is a measure of the directional relationship between the return on two risky assets.
- 15. Risk & Return Analysis 15 with Probability & without Probability Example: 𝒄𝒐𝒗 𝑨𝑩= .𝟏𝟎𝟖−.𝟎𝟗𝟗𝟑 × −.𝟎𝟔𝟕−.𝟏𝟎𝟕𝟑 + .𝟏𝟐𝟔−.𝟎𝟗𝟗𝟑 × .𝟏𝟏𝟑−.𝟏𝟎𝟕𝟑 +(.𝟎𝟔𝟒−.𝟎𝟗𝟗𝟑)×(.𝟐𝟕𝟔−.𝟏𝟎𝟕𝟑) 𝟑 = −.00244 =.0993 =.1073 15 Example: Correlation= .𝟎𝟎𝟏𝟓𝟓 .𝟎𝟖𝟒𝟖×𝟎.𝟎𝟏𝟖𝟖 =.9724 =.1026 =.0581 =.848 =.0188
- 16. 16 Risk & Return Analysis Portfolio What are the main objectives of Portfolio ? What is Expected Return on Portfolio ?
- 17. 17 Risk & Return Analysis Assume that the correlation coefficient between A and B is 0.4 What is the expected return of the portfolio comprising of stock A and B? Example of Portfolio Expected Return
- 18. 18 Risk & Return Analysis
- 19. 19 Risk & Return Analysis Portfolio Variance & Standard Deviation
- 20. 20 Risk & Return Analysis Example of Portfolio Variance & Standard Deviation
- 21. 21 Risk & Return Analysis . 𝟔
- 22. 22 Risk & Return Analysis CAPM Sharpe found that the return on an individual stock or a portfolio of stocks should equal its cost of capital. CAPM Where, R = required rate of return of security 𝑅𝑓 = risk free rate 𝑅 𝑚 = expected market return 𝛽𝑖 = beta of the security 𝑅 𝑚– 𝑅𝑓 = equity market premium R= 𝑹 𝒇+ (𝑹 𝒎– 𝑹 𝒇)𝜷𝒊
- 23. 23 Risk & Return Analysis What is Risk-free Return ? The risk-free rate of return is the theoretical rate of return of an investment with zero risk. What is Risk Premium ? A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield. Total Return
- 24. 24 Risk & Return Analysis Example of CAPM R= 𝑹 𝒇+ (𝑹 𝒎– 𝑹 𝒇)𝜷𝒊 = .05 + (.12 – .05).85 = .1095 10.95% Portfolio Beta 𝜷 𝒑= 𝑾𝒊 𝜷𝒊 Example of Portfolio Beta 24 𝜷 𝒑= 𝑾𝒊 𝜷𝒊 = (.15×.75)+(.35× 1.95)+ (.30 × 1.38) + (.20 ×1.16) = 1.4236
- 25. Thank You