VALUATION OF RISK AND RETURN IN MUTUAL FUND

PRESENTED BY
Anjali Agarwal 1 Jasna Dolaramani 7 Roshni Gandhi 9 Anisha Lulla 22 Deepika Malani 23 Juhaina Khan 41

Darshit Thakkar - 49

ACKNOWLEDGEMENT
We would like to thank Ms. Sanchita Roy, for giving us this wonderful opportunity to work on this topic. It was an amazing experience to work

on the same and grow our knowledge beyond

books. And we are honored to share the same with our fellow batch mates.

INDEX

WHAT IS MUTUAL FUND ?

Working of a mutual fund

RISK AND RETURN

The dilemma faced Determine the level of risk Categorized as systematic and non systematic risk To focus on portfolio rather than individual assets

RISK VS RETURNS

RETURNS ON MUTUAL FUND

What is Mean?
Formula

Where:
(sometimes call the X-bar) is the symbol for the mean.

(the Greek letter sigma) is the symbol for summation. X is the symbol for the scores. N is the symbol for the number of scores.

COMPOUND ANNUAL GROWTH RATE

Formula
CAGR = ( EV / BV)1 / n 1

Where:
EV = Investment's ending value BV = Investment's beginning value n = Number of periods (months, years, etc.)

Formula

Absolute Return or Point to Point Returns :

Absolute returns = 100* (Selling Price Cost Price)/ (Cost Price)

RISK ON MUTUAL FUND

1. Beta

Formula
=
=Cov(R1 Rm)/2m
Covariance of Market Return with Stock Return Variance of Market Return

Where : Cov (R1 Rm) = covariance between the return on security i and the
return on market portfolio.

2m = variance of return on the market portfolio =Rm-Rm2/(n-1)

2. Standard Deviation

Formula

PERFORMANCE MEASURES
SHARPE RATIO a) Risk Measure. b) Formula: R-Rf/ Where, R = Average Return Rf = Risk free rate = Standard Deviation.

PERFORMANCE MEASURES
TREYNOR MEASURE a) Treynors Objective. b) Components of Risk. c) Security Market Line. d) Formula: R-Rf/ Where, R = Average Return Rf = Risk free rate = Beta

PERFORMANCE MEASURES
JENSEN MEASURE: a) Capital Asset Pricing Model. b) Relationship between Risk and Expected Return. c) Formula: Rp = Ki + Bp(Rm-Ki) Where, Rp = Expected return of a portfolio Ki= Risk free rate of return Bp= Beta of a portfolio Rm= Expected return on market index Real return = Average return - CAPM

CALCULATION OF RISK AND RETURN CALCULATION OF RISK

Standard Deviation
The rate of return on stock X under different states of economy is presented below along with the probabilities of the occurrence of each state of the economy : Boom Probability of occurrence Rate of Return on stock X 0.4 40 Normal 0.3 30 Recession 0.3 20

Calculation of the expected rate of return and standard deviation of return of stock X . Solution : Calculation of Expected Rate of Return : State of Economy Boom Normal Recession Probability 0.4 0.3 0.3 Expected Rate of Return ( X ) Rate of Return (X) 40 30 20 Expected Return (X) 16 9 6 31

Calculation of the Standard Deviation on stock X State of Economy Boom Normal Recession Xi 40 30 20 (Xi Xi) 9 -1 -11 (Xi Xi) 81 1 121 P 0.4 0.3 0.3 Pi (Xi Xi) 32.4 0.3 36.3 69

Standard Deviation =

69 = 8.30.

Calculate the beta value from the following information

Year 1 2 3 4 5 6 7 8 9 10

Return on Security 10 12 13 10 8 11 16 12 18 20

Return on Market Portfolio 12 10 10 12 15 14 20 15 20 22

Solution : Calculation of Beta

Year 1 2 3 4 5 6 7 8 9 10 n=0

Ri 10 12 13 10 8 11 16 12 18 20 130

Rm 12 10 10 12 15 14 20 15 20 22 150

(Ri Ri ) -3 -1 0 -3 -5 -2 3 -1 5 7 Ri= 13

(Rm Rm) -3 -5 -5 -3 0 -1 5 0 5 7 Rm = 15

(Ri Ri) (Rm Rm) 9 5 0 9 0 2 15 0 25 49 114

(Rm Rm) 9 25 25 9 0 1 25 0 25 49 168

COV (Ri Rm) = ( Ri Ri ) ( Rm Rm ) / n 1 COV (Ri Rm) = 114 / 9 = 12.67 m = ( Rm Rm ) / n 1 m = 168 / 9 = 18.67 = COV (Ri Rm) / m

= 12.67 / 18.67 = 0.68 .

Calculation of Returns
Absolute return or Point to Point Returns :
Absolute return is the increase or decrease that an investment achieves over a given period of time expressed in percentage terms. Its calculated as follows: Absolute returns = 100* (Selling Price Cost Price)/ (Cost Price) For example you invested in asset in January 2005 at a price of Rs 12000. And you sold the investment in January 2012 at the cost of Rs 3200. Absolute returns in this case will be: Absolute returns = 100* (32000 12000)/12000 = 100 * 20000/12000 = 166.67% This measurement of return is the simplest and it does not consider time period. Most times it produces a large number so people are impressed!

Average Annual Return (AAR)

Average annual return (AAR) is the arithmetic mean of a series of rates of return. The formula for AAR is: AAR = (Return in Period 1 + Return in Period 2 + Return in Period 3 + Return in Period N) / Number of Periods or N Lets look at an example. Assume that an investment XYZ records the following annual returns: Year 2005 2006 2007 2008 Annual Return 20% 25% 22% -10%

AAR for the period from 2005 to 2008: = (20% + 25% + 22% -10%) / 4 = 57%/4 = 14.25% AAR is somewhat useful for determining trends . AAR is typically not regarded as a correct form of return measurement and thus it is not a common formula for analysis.

Compound Annual Growth Rate or CAGR

CAGR is the year-over-year growth rate of an investment over a specified period of time. Its an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. Lets assume you invested Rs 10,000 in Apr 2010 and by Apr 2011 your investment became Rs 30,000, by Apr 2012 it became Rs 15,000. What was the return on your investment for the period? The formula to calculate CAGR is :

CAGR Formula So CAGR for above example is : = ((15,000/10,000) ^ (1/2)) -1 = 22.47% If the investment states that it had an 8% annualized return over ten years, that means if you invested on Apr 1, and sold your investment on Mar 31 exactly ten years later, you earned the equivalent of 8% a year. However, during those ten years, one year the investment may have gone up 20% and another year it may have gone down 10%. In the example if the investment Rs 10,000 would have grown at the rate of 22.47% every year and at end of two years it would be Rs 15,000 as shown in calculation below. Year 1 2 Initial Value 10,000 12,247 Growth 2,247 2752 Final Value 12,247 15,000.

FUND RISK AND RETURN

Birla sun life medium term fund growth Mean - 9.86% Standard Deviation - 1.92% Beta - 0.31 Absolute Return from date 26-3-2008 to 22-01-2014 is 49.4 %* * Returns have been calculated after adjusting the NAVs for dividends, & bonus, if any. CAGR 10.46% HDFC medium term opportunities growth Mean - 8.66% Standard Deviation - 2.48% Beta - 0.46 Absolute Return from date 29-10-2010 to 22-01-2014 is 34.7%* * Returns have been calculated after adjusting the NAVs for dividends, & bonus, if any. CAGR 7.4% Franklin India Blue chip - Growth Mean - 3.83% Standard Deviation - 16.42% Beta - 0.85 Absolute Return from date 01-01-1999 to 22-01-2014 is 2555.1 %* * Returns have been calculated after adjusting the NAVs for dividends, & bonus, if any. NAV on 01-01-1999 is 9.27 & NAV on 22-01-2014 is 246.12860. CAGR - 1%.

ICICI Prudential Focused Bluechip Equity Growth Mean - 6.55% Standard Deviation - 16.79% Beta - 0.88 Absolute Return from date 26-05-2008 to 22-01-2014 is 103.0 %* * Returns have been calculated after adjusting the NAVs for dividends, & bonus, if any. NAV as on date 26-05-2008 is 10.00 & on 22-01-2014 is 20.3400 CAGR 7.13%

THANK YOU