403deRISK &RETURN PPT3

8/7/2019 403deRISK &RETURN PPT3

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Name of Institution

1

AMITY BUSINESS SCHOOL

Programme MBA(M&S) Semester II

COURSE FINANCIAL MANAGEMENT

Name of FacultyYOGESH MEHRA


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Name of Institution

RISK & RETURN

MBA ( M&S) 2012


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Name of Institution

Whatare investmentreturns? Investment returns measure the

financial results of an investment.

Returns may be historical orprospective (anticipated).

Returns can be expressed in:Currency terms.

Percentage terms.


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Name of Institution

What isthereturn on an investmentthat costs RE1,000and issold

after1 yearforRE1,100?

RE return:

Percentage return:

RE Received - RE Invested

RE1,100 - RE1,000

RE100.

RE Return/RE Invested

RE100/RE1,000 =0.10 =

10%.


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Name of Institution

What is investmentrisk?Typically, investment returns are not

known with certainty. Investment risk pertains to the

probability of earning a return lessthan that expected.

The greater the chance of a return farbelow the expected return, thegreater the risk.


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Name of Institution

Assumethe FollowingInvestment Alternatives

Economy Prob. T-Bill RIL TCS Am F. MP

Recession 0.10 8.0% -22.0% 28.0% 10.0% -13.0%

Below avg. 0.20 8.0 -2.0 14.7 -10.0 1.0

Average 0.40 8.0 20.0 0.0 7.0 15.0

Above avg. 0.20 8.0 35.0 -10.0 45.0 29.0

Boom 0.10 8.0 50.0 -20.0 30.0 43.0

1.00


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Name of Institution

Do thereturns ofRIL Inds.and Repo Men move with orcounterto theeconomy?

RIL Inds.moves withtheeconomy, so it ispositively correlated withtheeconomy. This isthetypical situation.

TCS moves counterto theeconomy. Suchnegative correlation isunusual.


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Name of Institution

Calculatetheexpected rate ofreturn on eachalternative.

. n

1=i

iiPr=r

r = expected rate of return.

rRIL= 0.10(-22%) + 0.20(-2%)

+ 0.40(20%) + 0.20(35%)

+ 0.10(50%) = 17.4%.

^

^


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Name of Institution

RIL has the highest rate of return.

Does that make it best?

r

RIL 17.4%

Market 15.0

Am. Foam 13.8T-bill 8.0

TCS 1.7

^


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Name of Institution

What isthestandard deviationofreturnsforeachalternative?

.

Variance

deviationtandard

1

2

2

!

!

!!

!

n

i

ii Prr

WW

W


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Name of Institution

WT-bills = 0.0%.WRIL = 20.0%.

W8 = 13.4%.WAm Foam= 18.8%.

WMarket= 15.3%.

.

1

2

!

!

n

i

iirrW

RIL Inds:

W = ((-22 - 17.4)20.10 + (-2 - 17.4)20.20+ (20 - 17.4)20.40 + (35 - 17.4)20.20

+ (50 - 17.4)20.10)1/2 = 20.0%.


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Name of Institution

Standard deviation measuresthestand-alonerisk ofan investment.

The largerthestandard deviation, the

highertheprobability that returns willbefarbelow theexpected return. Coefficient ofvariation isanalternativemeasure ofstand-alonerisk.


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Expected Return versus RiskExpectedSecurity return Risk, W

RIL Inds. 17.4% 20.0%Market 15.0 15.3

Am. Foam 13.8 18.8

T

-bills 8.0 0.0TCS 1.7


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Name of InstitutionCoefficient ofVariation:CV = Standard deviation/expected return.

CVT-BILLS = 0.0%/8.0% = 0.0.

CVRIL Inds = 20.0%/17.4% = 1.1.

CVtcs = 13.4%/1.7% = 7.9.

CVAm. Foam = 18.8%/13.8% = 1.4.

CVM = 15.3%/15.0% = 1.0.


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Stand-alone Market Diversifiable

Market risk is that part of a securitys

stand-alone risk that cannotbeeliminated by diversification.

Firm-specific, ordiversifiable, risk is

that part of a securitys stand-alone riskthat can be eliminated bydiversification.

risk risk =


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Name of Institution

The yearly price dataforasharescrip isasfollows

YEAR DIVIDEND (RS) CLOSING PRICE

2002 4.25 150

2003 5.50 256

2004 6 296

2005 6.75 354

2006 7.75 450

2007 9 375

2008 10.25 315

2009 11 395


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--

VARIANCE=1/(n-1)*(Ri-R)^2

SUM OF EXP RETURNS=144.4 AVG RETURN 20.63

V=5431.03/6=905.17

SD=V=30.09%


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Name of Institution

YEAR DIVIDEND

(RS)

CLOSING

PRICE

ER VARIANCE

2002 4.25 150

2003 5.50 256 74.33 2883.58

2004 6 296 17.97 7.11

2005 6.75 354 21.88 1.54

2006 7.75 450 29.31 75.23

2007 9 375 -14.67 1246.16

2008 10.25 315 -13.27 1149.28

2009 11 395 28.89 68.14


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Name of Institution

Good Average Poor

PROBABILITY 30% 50% 20%

RETURNS %

RIL 20 15 10

TCS 12 15 18


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Name of InstitutionEXPECTED ER AND RISKS RIL

CONDITIONS GOOD AVG POOR

EXPECTERRETURN

RETURN 20 15 10 15.5%

DEVIATION 4.50 -0.50 -5.50

PROB*DEVIA

TION

6.08 0.13 6.05

VARIANCE 12.25

SD 3.50%


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Name of InstitutionEXPECTED ER AND RISKS TCS

CONDITIONS GOOD AVG POOR

EXPECTERRETURN

RETURN 12 15 18 14.70%

DEVIATION -2.70 0.30 3.30

PROB*DEVIA

TION

2.19 0.05 2.18

VARIANCE 4.41

SD 2.10%


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Name of Institution

CONDITIONS ECONOMIC SCENARIO

GOOD AVG POOR EXPECTEDRETURN

RETURNS%

RIL 20 15 10 15.5%

TCS 12 15 18 14.70%

COVARIANCE

PROBABILITY 30% 50% 20%

DEVIATION RIL 4.5 -0.5 -5.5

DEVIATION TCS -2.7 0.30 3.30

PROB*PRODOFDEVIATIONS

-3.65 -0.08 -3.63


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Name of Institution

COV(R1R2)=SUMpi(R1-R1 BAR)(R2-R2 BAR)

COVARIANCE=-7.35

COEFF OF CORRELATION=COV(R1*R2)/SD 1*SD2=-1

BETA=COV(S,M)/^2M

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403deRISK &RETURN PPT3