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Unit 2: Risk and Return




                                                                                                Notes


             Case Study  Asian CERC – Last 6 Years

             The average market prices and dividend per share of Asian CERC Ltd. for the past 6 years
             are given below:
                     Year          Average market price (`)   Dividend per share (`)
                                             68
                     2007                                              3.0
                     2006                    61                        2.6
                     2005                    50                        2.0
                     2004                    53                        2.5
                     2003                    45                        2.0
                     2002                    38                        1.8

             What will be the average rate of return of Asian CERC Ltd.'s shares for past 6 years.
          All possible questions which the investor may ask, the most important one is concerned with
          the probability of actual yield being less than zero, that is, with the probability of loss. This is
          the essence  of risk.  A useful measure  of risk should somehow  take into account both the
          probability of various  possible "bad"  outcomes and  their associated magnitudes. Instead of
          measuring  the probability of a number of  different possible  outcomes, the  measure of risk
          should somehow estimate the extent to which the actual outcome is likely to diverge from the
          expected.
          Two  measures are used for this purpose:  The average (or mean) absolute  deviation and  the
          standard deviation.





             Case Study  Performance of Equity Shares at Wipro Ltd.

             The rate of return of equity shares of Wipro Ltd., for past six years are given below:

                    Year           01      02      03      04        05       06
               Rate of return (%)   12     18      -6      20        22       24

             Calculate the average rate of return, standard deviation and variance.
             Solution:

             Calculation of Average rate of Return (  R  )
                  R  12 18 6 20 22    24
             R   =   N        6           15%

                  (R R) 2
              2
                                                                               ......(1)
                    N

                                                                                 Contd...





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