Risk & ReturnAnalysis
Analysis of Risk & Return
Introduction:
 ‘Risk’ is common vocabulary and is widely used in the world of investment.
 No investment decision can be analysed with out taking the ‘risk’ of alterations into account.
Eg:
 100/=, 9% 2015 Govt. of India Loan – Zero Risk – as repayment is absolutely assured.
 200/=, 12% 2005 TISCO Non Convertible Debenture – Risk of default in case of bad co. performance.
 10/= Colgate Equity Share (80% in 200102) – Risky investment.
 Observations – the returns of the above three securities – 9%, 12%, 60% –
 Higher the returns, higher will be the risk.
Measuring:
 Probability of variation of expected income
 Possibility of loss
 A situation where the possible consequences of the decision that is to be taken are known.
Uncertainty:
 Situation where probabilities can not be estimated.
 The possible events and probabilities of their occurrence are not known
 Hence risk and uncertainty are different from each other.
Return:
 Is the realizable cash flow earned by its owner during a given period of time.
 It is expressed as a percentage of the beginning of period value of the investment
Types of return:

Realized return
 This is often the fact return or the return that was or could have been earned.
Eg: Bank deposit

Expected return:
 Is the return from an asset that investors anticipate or expect to earn over some future period
 The expected return is subject to uncertainty, or risk, or may or may not occur
Component of return:
 Periodic cash receipt (Interest or Dividend)
 Capital Gain/Loss
Probability and Rates of Return:
 A probability is a number that describes the chance of an event taking place
 Probabilities are governed by five rules and range from ‘0’ to ‘1’.
 In a world of uncertainty, the expected return may not materialize.
 In such a situation, the expected rate of return for any asset is the weighted average rate of return using the probability of each rate of return as the weight.