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7/31/2019 Sapm Risk Return
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Evaluation of various
investment avenues
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Return Risk Marketabilit
y/ Liquidity
Tax
shelter
convenienc
eCurrent
yield
Capital
appreciatio
n
Equity shares Low High High Fairly high High High
Non-
convertible
debentures
High Negligible Low Average Nil High
Equity shares Low High High High High Very High
Debt Moderate Low Low High No tax on
dividend
Very High
Bank deposits Moderate Nil Negligi
ble
High Low Very High
PPF Nil Moderate Nil Avg 80 C Very High
LI Nil Moderate Nil Avg 80 C Very High
Residential
house
Moderate Moderate Negligi
ble
Low High Fair
Gold & silver Nil Moderate Avg High Nil Avg
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Approaches to the
investment decisionmaking
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Fundamental approach Intrinsic value of security depends upon the underlying economic factors.
Factors related to company , industry and economy. Buy- undervalued (IV >MP), Sell overvalued (IV
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Risk & Return concepts
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Risk
Variation of return of income
Risk can be quantified and measured
Risk is the difference between expected return and actual
return.
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Sources of risks
market risk
Earing power of corporate sector. price of securities tend tofluctuate. Major cause appear to change in consumer sentiment.
Interest rate risk Interest rate goes up, market price of fixed income securities will
fall & vice versa.
Business risk
Emerging new technologies, changes in consumer preference,changes in government policiesetc. poor business performanceaffects the interest of equity holders.
Inflation risk
Currency risk
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Return
Reward for undertaking investment.
Total return =current return + capital return
R=C+(Pc-PB)/PB
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