Risk and Return F

Risk and Return Risk return general principle High risk gives high return
Bet 10000 Prize money 150000 HDIL Godrej Properties

Bet 10000 Market Price 6 Market price
Bet 10000 At one point of time 72 It was Rs 750 before six mon
Bet 10000 may go back to that level May go up to 1800
Chance factor for winning Bankrupt company Cash Rich co with good fundamenta
We prefer to invest in Godrej properties due to good fundamentals and positiv

Gambling uncertainty not meausrable information even if the expectation of profit return is less. Risk is measurable.
Return on different investments

Equity
Return 5th Sept 15th Jan Return
Inox 260 320 60 Capital gain
Dividend 10 Dividend Residual Return Higher Risk
Return 70
Debenture
5th sept 15th Jan
Face value 200 203 3 Capital gain
Interest 15 Interest Contractual Return Lower risk
Project
Discounted value of stream of return over the project period Add
Discounted value of Terminal Value Add
Capital Outlay Deduct Discounting factor
takes care of the
Net present value risk in the project
Real Estate
Discounted value of stream of rent Add
Resale value at the end of the study period Add
Discounting factor
takes care of the
Purchase value Deduct risk in the property
Gold
Discounted value of the metal at the end of the investment period Add
purchase value Deduct
Although there is no stream of income , the gold moentaization scheme of government provides 2.25%
annual return.
Calculation of the return

A bought a share of a company having a face value of Rs 10 at Rs 135 and sold it at Rs 152 after six months.
The Company paid a dividend of 10% during the period . What is the return from the stock.
Capital Gain 17 (152-135)
Dividend 1 1 10% on the face value of Rs 10
Return 18 Dividend rate always represents the rate on face value
A bought a share of a company having a face value of Rs 10 at Rs 135 and sold it at Rs 152 after two years.
The Company paid a dividend of 10% during both the years.. What is the rate return from the stock.
Capital gain 17 152-135
Dividend 2 10% on Rs 10 for two years
Return 19
Investment 135 Price at which it is bought
Dividend yield 2/135 1.48%
Capital gain yield 17/135 12.59%
14.07% Yield is always the market rate
Compounding annual growth rate
A bought a share of a company having a face value of Rs 10 at Rs 135 and sold it at Rs 152 after three years.
What is the compunding annual growth rate of the stock price.
Return generally calculated on (Current year price- previous year price) /previous year price
An average of the individual stock return is a good measure of return over a period of time.
However, CAGR measures the growth over last year and beginning year price assuming that there is a
continuous growth
Formula CAGR=(BVEV)n1−1
CAGR= (152/135)1/3 -1 = 4.03%

Although CAGR is found out for any financial figures it is generally used for Profit, Debt, Revenue and Capital
investment.
Risk
Two types of asset risk
Systematic Risk= Macro risk Uncontrollable , Beta is systematic risk, Example- COVID 19
Unsystematic Risk= Micro risk Controllable, Employee strike in a company
Standard deviation of a series of prices over a period of time is a good measure of risk involved in the
investment. Alternatively, variance is also used as a measure of risk.
The calculation of variance uses squares because it weighs outliers more heavily than data closer to the mean.
Price Price
Year A B
1 100 100
2 102 125
3 105 73
4 103 112
SD 1.80 19.19
Beta is the measure of relative risk of a stock or portfolio vis a vis the market.
Covariance of asset risk and market risk/ variance of market
The market risk is considered as 1. Beta= risk
Portfolio Risk
Diversification reduces risk.
Beta Investment Weigtage Weighted Beta
Reliance 0.95 50000 0.29 0.27
Cipla 0.55 40000 0.23 0.13
HUL 0.35 25000 0.14 0.05
Maruti 1.01 60000 0.34 0.35
175000 0.79 Portfolio Beta
Beta theortically can be negative when the asset beta moves in reverse direction against the market beta.
The relationship between stock and gold may give a negative beta
Capital Asset Pricing Model
ERi=Rf+βi(ERm−Rf)
ER= Expected Return Output
Rf= Risk free return Base
Beta= Risk of the investment Multiplier
ERm=market return Standard
(Erm-Rf)=market risk premium Differential
Assumption
1) securities markets are very competitive and efficient (that is, relevant information about the companies is
quickly and universally distributed and absorbed)
2) these markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from
returns on their investments.
3) Including beta in the formula assumes that risk can be measured by a stock’s price volatility. However,
price movements in both directions are not equally risky. The look-back period to determine a stock’s
volatility is not standard because stock returns (and risk) are not normally distributed.
4)The CAPM also assumes that the risk-free rate will remain constant over the discounting period
5) The market portfolio that is used to find the market risk premium is only a theoretical value and is not an
asset that can be purchased or invested in as an alternative to the stock.
Expected Market return 12%
Risk free return RBI Bond 7.50%
Beta 1.2
Expected Asset return= 7.5%+1.2 *(12%-7.5%) = 12.9%
Capital market line

Capital allocation line explains the a
Capital market line explains the alloc
As we go up in the line the investor
When the investor saves money to p
Efficient Frontier
The graph explains the interdepende
When higher risk of the protfolio do
The points on the curved line is the e
When both the allocation of capital
At this point the investor allocates th
Security line
https://www.youtube.com/watch?v
k gives high return
ITC
1400 Good Financials Solvency, Profitability, Activity, Liquidity
t was Rs 750 before six months Professional Management
Diversified Business
h co with good fundamentals Stock movement Bearish , Price recedes as soon as it reaches 220
We do not want to invest. Technical chart provides the information and
od fundamentals and positive base for measurability. A decision not to invest is due to measurability
n is less. Risk is measurable. of risk through technical charts.
o the mean.
market line
llocation line explains the allocation of the capital in various risk profiled assets.
market line explains the allocation of the calital for the market protfolio.
o up in the line the investor borrows fund and invests which is risky, If the efficent frontier touches the capital market line at this point it is
e investor saves money to put in risk free assets and the efficient frontier touches at this point it is called lending tangency portfolio
h explains the interdependence of stock performance in a portfolio.

gher risk of the protfolio does not lead to higher return it is called sub optimal or inferior portfolio.
ts on the curved line is the efficient frontier.
oth the allocation of capital and the selection of portfolio have an intersection point it is called optimal portfolio.
oint the investor allocates the funds properly and also selects the combination of stock most efficiently.
www.youtube.com/watch?v=mmQ8WvH8QDE
arket line at this point it is called borrowing tangency profile
g tangency portfolio

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Risk and Return Risk return general principle High risk gives high return

Bet 10000 Prize money 150000 HDIL Godrej Properties

We prefer to invest in Godrej properties due to good fundamentals and positiv

Return on different investments

Calculation of the return

CAGR= (152/135)1/3 -1 = 4.03%

Capital market line

h explains the interdependence of stock performance in a portfolio.

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