PPT_RiskReturn.pptx - Risk Return In which security will you invest \u2022 Security A gives annual expected return of 12 p.a \u2022 Security B gives annual

# PPT_RiskReturn.pptx - Risk Return In which security will...

This preview shows page 1 - 12 out of 41 pages. Risk & Return In which security will you invest? Security A gives annual expected return of 12% p.a. Security B gives annual expected return of 18% p.a. Option 1: Security A Option 2: Security B Option 3: Can not say Elements in Return Return on a typical investment consists of two components: (1) Periodic cash receipts(or income) on investment in the form of interest or dividends (2) Change in price of asset called capital gain/loss Total return = Income + Price change(+/-) RETURN OF A SINGLE ASSET Rate of Return = Annual income + Ending price-Beginning price Beginning price Beginning price Current yield Capital gains /loss yield Return Year Dividend (Rs.) Share Price (Rs.) Return (%) 2007 2 100 - 2008 2.5 108 =[2.5+(108-100)]/100 = 0.105 = 10.5% 2009 3 115 =[3+(115-108)]/108 = 0.0925 = 9.25% 2010 3 104 ?? 2011 4 120 ?? 6 1 1 0 1 0 1 1 0 0 0 Rate of return Dividend yield Capital gain yield DIV DIV P P P P R P P P AVERAGE ANNUAL RETURNS The arithmetic mean is defined as: n R i R = i=1 n The arithmetic mean return for stock A is: (19+14+22-12+5)/5 = 9.6% Year Total return (%) 1 19 2 14 3 22 4 -12 5 5 Can you Calculate Average Return? Year Price (Rs) Return 2013 50 2014 100 100% 2015 50 -50% Geometric Average Return Geometric average return measures compound , cumulative returns over time . It is used in investments to reflect the realized change in wealth over multiple periods. Geometric Return = [(1+0.19)(1+0.14)(1+0.22)(1-0.12)(1+0.05)] 1/5 -1 = 8.86% DATA ON THE NIFTY INDEX The return for the year ended 1991 is 559/331- 1 = 68.88 percent. The returns for other years have been calculated the same way. The means of the returns are calculated as under: Arithmetic Mean = ( 68.84 + 36.28 +-------------------+ 6.76 + 31.41)/ 24 = 19.57 % Geometric Mean =(1.6884x1.3628----------x1.0676x1.3141) 1/24 –1 = (25.0378)1/24-1 = 14.36 % Year ending NIFTY Annual return (%) Year ending NIFTY Annual return (%) 1990 331 - 2002 1094 3.25 1991 559 68.84 2003 1880 71.90 1992 761 36.28 2004 2081 10.68 1993 1043 36.95 2005 2837 36.34 1994 1182 13.40 2006 3966 39.83 1995 909 -23.15 2007 6139 54.77 1996 899 -1.04 2008 2959 -51.79 1997 1079 20.05 2009 5201 75.76 1998 884 -18.08 2010 6135 17.95 1999 1480 67.42 2011 4624 -24.62 2000 1264 -14.65 2012 5905 27.70 2001 1059 -16.18 2013 6304 6.76 2014 8284 31.41 Expected Return based on Probability Scenario Probability(P) Return(R) Expected return= PxR Boom 0.30 16% 0.30X16 =4.8% Normal 0.50 12% 0.50x12 = 6% Recession 0.20 8% 0.20x8 = 1.6% TOTAL EXPECTED RETURN = 4.8% +6%+1.6% = 12.4% 11  #### You've reached the end of your free preview.

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• Fall '16
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