Risk & return Darr ke aage Jeet Hai!!!
Risk & return
Darr ke aage Jeet Hai!!!
Return
• Literal Meaning – “Give Back”
• Financial Literacy – “Give Back with Profits”
Calculation
• Single Period
• Multi Period
• Compounded Return
Ex – Post & Ex - Ante
• Experienced Incomes – Dividends
• Capital Appreciation Experienced – Stock
• Expected Incomes – Dividends
• Capital Appreciation Expected - Stocks
Portfolio Return
• Weighted Average Return
Stock Price as on 01-04-XX
Price as on 31-03-X1
Yearly Dividend
Rate of Return (%)
X 20 30 2 ??
Y 30 40 3 ??
Z 50 60 5 ??
Portfolio of (X,Y & Z)
100 130 10 ???
AnalyzeStock 01 02 03 04 05
Sterlite 30% 28% 34% 32% 31%
Bauxite 26% 13% 48% 11% 57%
• Which one would you pick?
Risk
• Deviation from that of the Expectation• Uncertainty - Variation in Returns• Standard Deviation & Variance is the common
measure in Finance
Standard Deviation
• What is this?• What are the uses?• By –Heart the formulae.
Co-Relation
• Relationship – Of the Movement– Of the Style
• What is the use– Learn the Pattern– Determine the Relationship factor
Portfolio Risk
• Benefits of a Portfolio ? - Assignment
• Portfolio Risk of Sterlite & Bauxite• 40% in Sterlite & 60% in Bauxite
Expected Return on
Sterlite
Expected Return on
Bauxite
Std Dev of Sterlite
Std Dev of Bauxite
Coefficient Co-relation
20% 30% 10% 16% -1 , 0.5 , +1
RISK
Company Specific
Market Specific
Company Specific
• Sector Specific– Regulation & Legislation– Cartels , Guilds
• Company Specific– Management– Capital Structure– Performance
Market Specific
• “Follow the Economy, For the Stocks do the same” – Warren Buffet
• Every Stock would have a co-variance with the market, hence the existence of Market Risk.
• This Risk cannot be avoided. They are like kink in the Thermometer
Non – Systematic Risk
Systematic Risk
Stan
dard
Dev
iatio
n of
Por
tfolio
Ret
urn
%
Number of Securities
B eeeeeeee T aaaaaaaaaa
• The Unsystematic risk can be diversified but the Systematic one?
• We cannot avoid the Systematic Risk by diversification, rather Minimize them.
• Thus we use Beta, Which is formed from the Equation
• Y = a + bx + e
• Beta = Covariance ( Stock & Market )
Variance of The Market
• Substitution of the Formulae’s can help you learn more of the Relationships
• Egs, Lower the Co – Relation between Market & Stock, Lower will be Beta & Vice Versa.
Risk Measurement
• Systematic Risk– BETA Square * Variance of the Market
• Unsystematic Risk– Variance of the Stock - Systematic Risk