Risk & Return

Risk is the deviation between expected cash flow and

actual cash flow.

Uncertainty means the unfavorable event which are

not countable.

Risk v/s uncertainty

No/ heading
1. Measure

Risk
Risk can be measured by past experience Risk are countable

Uncertainty
Uncertainty can not be measured Uncertainty is not countable But uncertainty can not be managed Uncertainty can not be mitigated

2. Count

3. Manage

Some of risk can be managed Risk can be mitigated

4. Mitigate

Types of Risk
Risk considering the number of assets-----

1. Stands alone basis risk 2 .Portfolio context risk o Risk considering diversifiability can be divide --1.Divercifiable risk (unsystematic risk) ----Business risk ----Financial risk 2.Non diversifiable risk (systematic risk) ----Interest rate risk ----market risk ----Purchasing power risk

 Stands alone-- The risk that an investor exposed to if

he has only one assets Portfolio context The risk that an investor would be exposed to if he or she has more than one assets Market prices of investments, particularly equity shares may fluctuate widely within a short span of time even though the earnings of the company are not changing. Change in market price causes the return from investment to very. This is known as market risk.

Different between stand alone & portfolio risk

No/Heading 1. Definition Stand alone Portfolio The risk that an investor The risk that an investor exposed to if he has only would be exposed to if one assets he or she has more than one assets

2. Basis

Here only one asset

Here more than one assets Project A , B ,C total 100% share in this 3 sectors

3. Example

Project A- Total 100% investments here

Return
In case of investments; the expected return of the

investment is the probability weighted average of all the possible returns. The return is the basic motivating force and the principal reward in the investment process. The return may be defined in terms of (i) realized return, i.e., the return which has been earned, (ii) expected return, i.e., the return which the investor anticipates to earn over some future investment period.

The expected return is a predicted or estimated return

and may or may not occur. The realized returns in the past allow an investor to estimate cash inflows in terms of dividends, interest, bonus, capital gains, etc, available to the holder of the investment. The return can be measured as the total gain or loss to the holder over a given period of time and may be defined as a percentage return on the initial amount invested. With reference to investment inequity shares, return is consisting of the dividends and the capital gain or loss at the time of sale of these shares.

Problem & Solution