Risk and Risk Calculation

7/27/2019 Risk and Risk Calculation

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Investors always make investment in expectation ofreturn. But return is always subjected to the riskattached. Risk arises whenever the actual return isdifferent from the expected return.so to understand risk it is essential tounderstand concept of risk and return


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Basic motivating force and principal reward ininvestment process. Defined in 2 terms : REALISED RETURN and

EXPECTED RETURN. Return can be measured as the total gain or loss toholder over a period of time and defined aspercentage return on initial amount of invested.


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Risk in investment analysis means future returns areunpredictable. It refers to chance that actual return will differ from

expected return. More simpler it is variation in return. risk is different from uncertainty :risk is a situationwhere possibility of happing and non happing of event

can be measured but incase of uncertainty possibilitycannot be measured


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1. MARKET RISK

2. INTREST RATE RISK

3. INFLATION RISK

4. BUSSINESS RISK

5. FINANCIAL RISK


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On the basis of sources of risk in investment risk isclassified as:i. systematic riskii. Unsystematic risk


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MEANING: It refers to that portion of variabilityin return which is caused by factors affecting allfirms.FCATORS: money supply, inflation, recession ,interest rate policies, tax rate etc.NATURE: non-diversifiable , external anduncontrollable.


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MEANING: It represent the fluctuation in return due tofactors which are specific to particular firm or market. FACTORS: Are called as firm specific.NATURE: Diversifiable, controllable and internal


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SOURCES NATURE TYPEMARKET RISK EXTERNAL

UNCONTROLABLE

SYSTEMATIC RISK

INFLATION RISK EXTERNAL

UNCONTROLABLE

SYSTEMATIC RISK

INTREST RATE

RISK

EXTERNAL

UNCONTROLABLE

SYSTEMATIC RISK

BUSSINESS RISK INTERNAL

CONTROLABLE

UNSYSTEMATIC

RISK

FINANCIAL RISK INTERNAL

CONTROLABLE

UNSYSTEMATIC

RISK


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Statistical measures can be used to make measurementof risk more precise. Measures are: RANGESTANDARD DEVIATIONBETA


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RANG: It is difference between highest and lowest expectedreturn.For eg: the return from investment fluctuate between20% to 25%.Therefore rang is 25%-20%= 5%


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Reliable and convenient way to quantify risk.To measure the degree of spread possible returns aroundthe expected return. standard deviation= SD= p (xr)


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Returns(x) Probability(p) P *x (x-r)20 .15 0.03 3.24

21 .10 0.021 0.64

22 .60 0.132 0.04

23 .10 0.023 1.44

24 .05 0.012 4.84

p(x-r).486

.064

.024

.144

.242

SD= p (xr)

0.96 = 0.9798

r=21.8% 0.961


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INVESTMENT DECISION:

HIGH RISK LOW RISKHIGH RETURN MAY BE DEFINITE

LOW RETURN NO INVESTMENT MAY BE


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BETA () measures the risk of one security/portfolio inrelation to market risk. Market risk is variation in benchmark market index.

Beta RISK

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Risk and Risk Calculation

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