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    Risk Return Relationship

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    Junaid Pantheeran
    The document discusses the relationship between risk and return in investments. It states that risk is inherent in any investment and can arise from factors like loss of principal, delay in repayment, or variability in returns. Normally, higher risk investments correspond to higher potential returns. There are different types of risks including systematic risks related to broader market forces and unsystematic risks specific to a particular investment. The level of risk also varies between different types of securities with equity/venture investments carrying the most risk but also potential for highest returns, while government bonds carry the least risk but also lowest returns. The key relationship is that investors expect greater returns to compensate for taking on higher levels of investment risk.

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    Attribution Non-Commercial (BY-NC)
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    Risk Return Relationship

    Uploaded by

    Junaid Pantheeran
    557 views10 pages
    The document discusses the relationship between risk and return in investments. It states that risk is inherent in any investment and can arise from factors like loss of principal, delay in repayment, or variability in returns. Normally, higher risk investments correspond to higher potential returns. There are different types of risks including systematic risks related to broader market forces and unsystematic risks specific to a particular investment. The level of risk also varies between different types of securities with equity/venture investments carrying the most risk but also potential for highest returns, while government bonds carry the least risk but also lowest returns. The key relationship is that investors expect greater returns to compensate for taking on higher levels of investment risk.

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    The document discusses the relationship between risk and return in investments. It states that risk is inherent in any investment and can arise from factors like loss of principal, delay in repayment, or variability in returns. Normally, higher risk investments correspond to higher potential returns. There are different types of risks including systematic risks related to broader market forces and unsystematic risks specific to a particular investment. The level of risk also varies between different types of securities with equity/venture investments carrying the most risk but also potential for highest returns, while government bonds carry the least risk but also lowest returns. The key relationship is that investors expect greater returns to compensate for taking on higher levels of investment risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    557 views10 pages

    Risk Return Relationship

    Uploaded by

    Junaid Pantheeran
    The document discusses the relationship between risk and return in investments. It states that risk is inherent in any investment and can arise from factors like loss of principal, delay in repayment, or variability in returns. Normally, higher risk investments correspond to higher potential returns. There are different types of risks including systematic risks related to broader market forces and unsystematic risks specific to a particular investment. The level of risk also varies between different types of securities with equity/venture investments carrying the most risk but also potential for highest returns, while government bonds carry the least risk but also lowest returns. The key relationship is that investors expect greater returns to compensate for taking on higher levels of investment risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    RISK-RETURN

    RELATIONSHIP
    RISK : Risk in an investment can arise out of several factor. It is
    inherent in any investment. This risk may relate to loss or delay
    in repayment of the principal capital or loss or non-payment of
    interest or variability of returns. While some investments are
    almost risk less like Govt. securities or bank deposits, others
    are more risky.
    RETURN: Return is defined as gain in the value of investment.
    Return differs amongst different instruments. The most
    important factor influencing return is risk. Normally, the higher

    the risk ,the higher is the return.


    Types of Risks
     Systematic Risks
     - Market risk
    - Interest rate risk
    - Currency risk
    - Political risk
    - Inflation risk
     Unsystematic Risks
     -Liquidity risk
     -Operational risk
     -Default risk
    •
    RISK RETURN RELATIONSHIP

    Venture fund(highest
    risk
    risk))
    Equity shares

    convertible debentures / MFs

    Non-convertible debentures
    RETURN

    PSU bonds

    Lowest Risk (Bank deposits)

    RISK
    Low Risk vs. High Risk
    Investments

    4
    Maximize returns,
    minimize risks

    5
    Maximize returns, minimize
    risks

    6
    Return
    end - of - period wealth -- beginning - of - period wealth
    Return =
    beginning - of - period wealth

    V0Initial value of investment

    V1 Final value of investment

    Return is V1 − V0
    r=
    V0

    Or as a percentage r = V1 − V0 ×100
    V0
    Return
    • Example 1
    – An initial investment of $10,000 is made.
    One year later, the value of the
    investment has risen to $12,500. The
    return on the
    12500 investment is
    − 10000
    r= × 100 = 25%
    • 10000
    • Example 2
    – An investment initially costs $5,000.
    Three months later, the investment is
    sold for 6000
    $6,000.
    − 5000The return on the
    r=
    investment ×100 =months
    per three 20% is
    5000
    •
    Risk-return trade-off in
    different types of securities
     Various types of securities:
    • Equity securities may be
     -Ordinary share or Common share, gives real
    ownership because holder bears ultimate risk and
    enjoy return and have voting rights
     -Preferential share, enjoy fixed dividend, avoids
    risk, do not have voting right.
    • Debt securities may be
     -Bond, a secured debt instrument, payable on first
    on liquidity
     -Debenture, an unsecured debt instrument,
    • Derivative securities are those that derive their
    value in whole or in part by having a claim on some
    underlying value. Options and
     futures are derivative securities
    Return and Risk
    • The greater the risk of a security, the
    higher is expected return
    • Return is the compensation that has to be
    paid to induce investors to accept risk
    • Success in investing is about balancing
    risk and return to achieve an optimal
    combination
    • The risk always remains because of
    unpredictable variability in the returns
    on assets

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