Sapm1
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This document discusses key concepts related to risk and return in investments. It defines total return as the cash payments received plus the ending price minus the beginning price. It also discusses return relative, cumulative wealth index, arithmetic vs geometric mean, sources of systematic and unsystematic risk, diversifiable vs non-diversifiable risk, and how variance, standard deviation, expected return, and probability distributions relate to measuring investment risk.
Sapm1
- 1. RISK & RETURN Akshay Samant
- 2. Securities to be held Funds to be allocated Portfolio Analysis, Selection and Management Investors are concerned with two inherent properties of securities: -Risk -Return
- 3. Total Return: C + (P E - P B ) R = P B R = total return over the period C = cash payment received during the period P E = ending price of the investment P B = beginning price of the investment
- 4. Return Relative C + P E = P B Put differently return relative = 1 + total return
- 5. Cumulative Wealth Index Measures the level of wealth CWI n = WI O (1+R 1 ) (1+R 2 )…….(1+R n) CWI n = Cumulative wealth index at the end of the year WI O = beginning index value which is typically rupee one R i = total return for year i (i = 1,2,……,n)
- 6. 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.
- 7. 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.
- 8. Sources of systematic risk Sources of unsystematic risk Types of Risk: Systematic risk Unsystematic risk
- 9. Types of systematic risk: - market risk - interest rate risk - purchasing power risk Types of unsystematic risk - business risk - financial risk
- 10. Diversifiable risk is unsystematic risk Non-diversifiable risk is systematic risk Total risk = Diversifiable risk + Non- diversifiable risk Beta measures the non-diversifiable risk.
- 11. 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