Page 61 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances Mahesh Kumar Sarva, Lovely Professional University

Notes Unit 4: Risk and Return Analysis

CONTENTS
Objectives
Introduction

4.1 Types of Investment Risk
4.2 Measurement of Risk
4.2.1 Volatility
4.2.2 Standard Deviation
4.2.3 Probability Distributions
4.2.4 Beta
4.3 Risk and Expected Return

4.4 Determinants of the Rate of Return
4.5 Risk-return Relationship
4.6 Portfolio and Security Returns
4.7 Return and Risk of Portfolio
4.7.1 Return of Portfolio (Two Assets)
4.7.2 Risk of Portfolio (Two Assets)
4.7.3 Risk and Return of Portfolio (Three Assets)
4.8 Portfolio Diversification and Risk
4.9 Summary

4.10 Keywords
4.11 Review Questions
4.12 Further Readings

Objectives

After studying this unit, you will be able to:
 Differentiate between systematic and non-systematic return;
 Recognize the use of 'Beta' in estimating returns;

 Learn how to measure risk and return of portfolio.

Introduction

Risk can be defined as the probability that the expected return from the security will not
materialize. Every investment involves uncertainties that make future investment returns
risk-prone. Uncertainties could be due to the political, economic and industry factors.
Risk could be systematic in future depending upon its source. Systematic risk is for the market
as a whole, while unsystematic risk is specific to an industry or the company individually.

56 LOVELY PROFESSIONAL UNIVERSITY