Page 96 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 4: Risk and Return

The risk/return trade-off could clearly be called the “ability-to-sleep-at-night test.” Notes
While some people can deal with the equivalent of financial skydiving without batting an
eye, others are terrified to climb the financial ladder without a secure harness.

The investor can minimise his risk on the portfolio. Risk avoidance and risk minimisation
are the important aims of portfolio management.

A portfolio contains different securities; by combining their weighted returns we can find
the expected return of the portfolio.

4.10 Keywords

Beta: It is a measure of the systematic risk of a security that cannot be avoided through
diversification.
Bull-Bear Market Risk: This risk arises from the variability in the market returns resulting from
alternating bull and bear market forces.

Country Risk: Country risk, also referred to as political risk, is an important risk for investors
today.
Default Risk: It is that portion of an investment’s total risk that results from changes in the
financial integrity of the investment.
Liquid Assets Risk: It is that portion of an asset’s total variability of return which results from
price discounts given or sales concessions paid in order to sell the asset without delay.
Liquidity Risk: Liquidity risk is the risk associated with the particular secondary market in
which a security trades.
Non-systematic Risk: The variability in a security’s total returns not related to overall market
variability is called the non-systematic (non-market) risk.

Risk: Risk is associated with the variability of the rates of return from an investment.
4.11 Review Questions

1. Define risk and return.
2. What do you mean by security return?
3. What are the different types of risk influences on investment?
4. Explain systematic and unsystematic risk.

5. Define beta. How does it influence on investment decision – making process?
6. Define Alpha.
7. How do you measure historical return and risk?

8. Write the different steps in calculating expected return and risk.
9. What do you mean by portfolio diversification?

Answers: Self Assessment

1. Systematic 2. Unsystematic
3. True 4. False

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