{"id":24993,"date":"2022-06-01T07:29:43","date_gmt":"2022-06-01T07:29:43","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=24993"},"modified":"2023-01-24T00:51:46","modified_gmt":"2023-01-23T19:21:46","slug":"risk-expected-return","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-expected-return\/","title":{"rendered":"Learn About Risk &#038; Expected Return From Stock Market Course"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"24993\" class=\"elementor elementor-24993\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-1452744 elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"1452744\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div 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data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/stock-market-investments\/\">Stock Market & Investments<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-in-stock-market\/\">Risk In Stock Market<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/measurement-of-risk\/\">Measurement of Risk<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-expected-return\/\">Risk & Expected Return<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-return-relationship\/\">Risk & Return Relationship<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/market-analysis-its-impact-on-prices\/\">Market Analysis & Its Impact On Prices<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/industry-analysis\/\">Industry Analysis<\/a><\/li><li><i class=\"fa 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      <i class=\"far fa-edit\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Study<\/span>                            \n                                                    <\/li>\n                                            <li id=\"slides\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"2\" role=\"tab\" tabindex=\"-1\" aria-controls=\"slides-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"fas fa-book-open\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Concept-of-Risk' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.1 Concept of Risk<\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-77233 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk.png\" alt=\"Concept of Risk\" width=\"1838\" height=\"1445\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk.png 1838w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-300x236.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-1024x805.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-768x604.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-1536x1208.png 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-50x39.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-100x79.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Risk-150x118.png 150w\" sizes=\"(max-width: 1838px) 100vw, 1838px\" \/><\/p>\r\n<p><strong><b>Risk and Expected Return in Investment Decisions<\/b><\/strong><\/p>\r\n<p>When investors evaluate opportunities, two central factors dominate the decision-making process: <strong><b>risk<\/b><\/strong>\u00a0and <strong><b>expected return<\/b><\/strong>. Risk refers to the uncertainty or variability in returns, while expected return represents the reward anticipated from the investment. Balancing these two is the essence of portfolio management.<\/p>\r\n<p><strong><b>Understanding Risk<\/b><\/strong><\/p>\r\n<p>Risk can be described as the degree to which actual returns deviate from expected returns. Statistically, this variability is measured using tools such as <strong><b>variance<\/b><\/strong>, <strong><b>standard deviation<\/b><\/strong>, or the <strong><b>coefficient of range<\/b><\/strong>. The higher the dispersion, the greater the risk.<\/p>\r\n<p>Several factors influence the level of risk in an investment:<\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Maturity Period<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>Longer maturity instruments (like 20-year corporate bonds) carry higher risk because of exposure to interest rate changes and inflation.<\/li>\r\n<li>Short-term deposits (like 1-year fixed deposits) are relatively safer.\r\n<ol start=\"2\">\r\n<li><b><\/b><strong><b>Creditworthiness of Issuer<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>Government bonds issued by the Reserve Bank of India are considered safe due to sovereign backing.<\/li>\r\n<li>Corporate bonds from companies with lower credit ratings (e.g., BB or below) carry higher default risk.\r\n<ol start=\"3\">\r\n<li><b><\/b><strong><b>Nature of Instrument<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>Government securities and bank fixed deposits are low-risk.<\/li>\r\n<li>Corporate debentures are moderately risky.<\/li>\r\n<li>Equity shares are the riskiest, as shareholders bear residual risk in case of bankruptcy.\r\n<ol start=\"4\">\r\n<li><b><\/b><strong><b>Liquidity<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>Investments that can be quickly sold without significant loss (like blue-chip stocks listed on NSE) are less risky.<\/li>\r\n<li>Real estate, though potentially rewarding, is less liquid and therefore riskier.\r\n<ol start=\"5\">\r\n<li><b><\/b><strong><b>Economic and Industry Factors<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>A slowdown in the IT sector impacts companies like Infosys or TCS more than utilities like NTPC.<\/li>\r\n<li>Inflation, interest rate changes, and global events (oil price shocks, geopolitical tensions) also add layers of risk.<\/li>\r\n<\/ul>\r\n<p><strong><b>Expected Return<\/b><\/strong><\/p>\r\n<p>Expected return is the compensation investors seek for bearing risk. It has two components:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Yield<\/b><\/strong>\u2192 Regular income such as dividends or interest.<\/li>\r\n<li><b><\/b><strong><b>Capital Appreciation<\/b><\/strong>\u2192 Increase in the value of the asset over time.<\/li>\r\n<\/ul>\r\n<p>For example:<\/p>\r\n<ul>\r\n<li>A government bond may offer a fixed yield of 6% with minimal capital appreciation.<\/li>\r\n<li>A stock like Reliance Industries may provide dividends plus potential price appreciation, leading to higher expected returns but with greater volatility.<\/li>\r\n<\/ul>\r\n<p><strong><b>Comparative Risk Levels of Instruments<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Instrument<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Risk Level<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Return Potential<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Example<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Government Bonds<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Very Low<\/p>\r\n<\/td>\r\n<td>\r\n<p>5\u20136%<\/p>\r\n<\/td>\r\n<td>\r\n<p>RBI Sovereign Bonds<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Bank Fixed Deposits<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Low<\/p>\r\n<\/td>\r\n<td>\r\n<p>6\u20137%<\/p>\r\n<\/td>\r\n<td>\r\n<p>SBI Fixed Deposit<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Corporate Debentures<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>Medium<\/p>\r\n<\/td>\r\n<td>\r\n<p>8\u201310%<\/p>\r\n<\/td>\r\n<td>\r\n<p>Tata Motors Debenture<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Equity Shares<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>High<\/p>\r\n<\/td>\r\n<td>\r\n<p>12\u201320%<\/p>\r\n<\/td>\r\n<td>\r\n<p>Infosys, Reliance<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Real Estate<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>High<\/p>\r\n<\/td>\r\n<td>\r\n<p>Variable<\/p>\r\n<\/td>\r\n<td>\r\n<p>Residential Property in Mumbai<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p><strong><b>\u00a0<\/b><\/strong><\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Concept-of-Return' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.2 Concept of Return<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77234 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return.png\" alt=\"Concept of Return\" width=\"1747\" height=\"1659\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return.png 1747w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-300x285.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-1024x972.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-768x729.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-1536x1459.png 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-50x47.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-100x95.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Concept-of-Return-150x142.png 150w\" sizes=\"(max-width: 1747px) 100vw, 1747px\" \/><\/p>\r\n<p>Investment can be thought of as <strong><b>delayed consumption<\/b><\/strong>. Instead of spending money today, investors set it aside with the expectation of receiving more in the future. This idea is linked to the <strong><b>time preference for money<\/b><\/strong>\u00a0\u2014 people generally prefer to consume now rather than later. To persuade them to postpone consumption, they must be compensated with a return.<\/p>\r\n<p><strong><b>Real vs Nominal Return<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Real Rate of Return<\/b><\/strong>\u2192 The compensation for postponing consumption, assuming no inflation.<\/li>\r\n<li><b><\/b><strong><b>Nominal Rate of Return<\/b><\/strong>\u2192 The real rate plus expected inflation.<\/li>\r\n<li>If inflation is not accounted for, the real return may become zero or even negative.<\/li>\r\n<\/ul>\r\n<p><strong><b>Example 1: Government Bond<\/b><\/strong><\/p>\r\n<p>Suppose an investor buys a government bond worth \u20b91,000.<\/p>\r\n<ul>\r\n<li>Real return expected = 4%<\/li>\r\n<li>Inflation expected = 5%<\/li>\r\n<\/ul>\r\n<p>If only the real return is paid, the investor receives \u20b91,040 after one year. But with inflation at 5%, the purchasing power is eroded, leaving the investor with no real gain. Therefore, the <strong><b>nominal return<\/b><\/strong>\u00a0must be at least 9% (4% real + 5% inflation) to ensure positive returns.<\/p>\r\n<p><strong><b>Example 2: Corporate Equity<\/b><\/strong><\/p>\r\n<p>Now consider equity shares of a company:<\/p>\r\n<ul>\r\n<li>Real return expected = 6%<\/li>\r\n<li>Inflation = 4%<\/li>\r\n<li>Risk premium (for equity volatility) = 5%<\/li>\r\n<\/ul>\r\n<p>Nominal return = 6% + 4% + 5% = <strong><b>15%<\/b><\/strong><\/p>\r\n<p>Here, the investor demands a higher return because equities carry additional risk compared to government bonds.<\/p>\r\n<p><strong><b>Factors Influencing Return<\/b><\/strong><\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Time Preference<\/b><\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n<li>Longer waiting periods require higher compensation.<\/li>\r\n<li>Example: A 10-year bond must offer more than a 1-year deposit.\r\n<ol start=\"2\">\r\n<li><b><\/b><strong><b>Inflation<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>Higher inflation expectations push up nominal returns.<\/li>\r\n<li>Example: In India, if inflation is projected at 6%, investors demand higher yields on bonds.\r\n<ol start=\"3\">\r\n<li><b><\/b><strong><b>Risk Premium<\/b><\/strong><\/li>\r\n<\/ol>\r\n<\/li>\r\n<li>Riskier assets must offer extra compensation.<\/li>\r\n<li>Example: Start-up equity shares may need to promise 18\u201320% returns compared to 6\u20137% on government securities.<\/li>\r\n<\/ul>\r\n<p><strong><b>Comparative Illustration<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Asset Type<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Real Return<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Inflation<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Risk Premium<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Nominal Return<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Government Bond<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>3%<\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>0%<\/p>\r\n<\/td>\r\n<td>\r\n<p>8%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Bank FD<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>4%<\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>1%<\/p>\r\n<\/td>\r\n<td>\r\n<p>10%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Corporate Bond<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>3%<\/p>\r\n<\/td>\r\n<td>\r\n<p>13%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Equity Shares<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>17%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Determinants-of-the-rate-of-return' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h3 style=\"text-align: left\"><strong>4.3 Determina<\/strong><strong>nts of Rate of Return<\/strong><\/h3>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-77235 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns.png\" alt=\"Determinants of Returns\" width=\"1613\" height=\"2011\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns.png 1613w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-241x300.png 241w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-821x1024.png 821w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-768x958.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-1232x1536.png 1232w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-40x50.png 40w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-80x100.png 80w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Determinants-of-Returns-150x187.png 150w\" sizes=\"(max-width: 1613px) 100vw, 1613px\" \/><\/p>\r\n<p>When investors commit money to an asset, they expect a certain <strong><b>rate of return<\/b><\/strong>. This return is shaped by three fundamental components:<\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Risk-free real rate<\/b><\/strong>\u2013 The basic compensation for postponing consumption in a world without inflation.<\/li>\r\n<li><b><\/b><strong><b>Inflation premium<\/b><\/strong>\u2013 Adjustment for the erosion of purchasing power due to rising prices.<\/li>\r\n<li><b><\/b><strong><b>Risk premium<\/b><\/strong>\u2013 Extra reward for bearing uncertainty unique to the investment.<\/li>\r\n<\/ol>\r\n<p>Thus, the required return can be expressed as:<\/p>\r\n<p><strong>Required Return=Risk-Free Real Rate+Inflation Premium+Risk Premium<\/strong><\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Calculation-of-Return' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h3 style=\"text-align: left\"><strong>4.4 Calculation of Return<\/strong><\/h3>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-77236 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns.png\" alt=\"Calculation of Returns\" width=\"1927\" height=\"1892\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns.png 1927w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-300x295.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-1024x1005.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-768x754.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-1536x1508.png 1536w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-50x50.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-100x98.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2022\/05\/Calculation-of-Returns-150x147.png 150w\" sizes=\"(max-width: 1927px) 100vw, 1927px\" \/><\/p>\r\n<p>The return from an investment is not just one figure; it is made up of two parts:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Yield<\/b><\/strong>\u2192 Regular income such as interest or dividends.<\/li>\r\n<li><b><\/b><strong><b>Capital Appreciation<\/b><\/strong>\u2192 Increase in the asset\u2019s price compared to its purchase price.<\/li>\r\n<\/ul>\r\n<p>Mathematically:<\/p>\r\n<p>R<sub>t =<\/sub>l<sub>t <\/sub>+ P<sub>t<\/sub><sub>\u00a0<\/sub>&#8211; P<sub>t-1<\/sub>\/ P<sub>t-1<\/sub><\/p>\r\n<p>Where:<\/p>\r\n<ul>\r\n<li>R<sub>t<\/sub>= Rate of return in time period<\/li>\r\n<li>l<sub>t<\/sub>= Income received during<\/li>\r\n<li>P<sub>t<\/sub><sub>\u00a0<\/sub>= Price at the end of<\/li>\r\n<li>P<sub>t-1<\/sub>= Price at the beginning of<\/li>\r\n<\/ul>\r\n<p>This can be split into:<\/p>\r\n<p>R<sub>t =<\/sub>I<sub>t\/<\/sub>P<sub>t-1 \u00a0+ <\/sub>P<sub>t <\/sub>-P<sub>t-1 \/<\/sub>P<sub>t-1 <\/sub><\/p>\r\n<ul>\r\n<li>I<sub>t\/<\/sub>P<sub>t-1<\/sub>\u2192 <strong><b>Current Yield<\/b><\/strong><\/li>\r\n<li>P<sub>t <\/sub>-P<sub>t-1 \/<\/sub>P<sub>t-1 <\/sub>\u2192 <strong><b>Capital Gain Yield<\/b><\/strong><\/li>\r\n<\/ul>\r\n<p>Or simply:<\/p>\r\n<p>Rate of\u00a0 Return =Current Yield +Capital Gain Yield\u00a0<\/p>\r\n<p><strong><b>Example 1: Equity Share<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Purchase price (P<sub>t-1<\/sub>) = \u20b9200<\/li>\r\n<li>Dividend received (I<sub>t<\/sub>) = \u20b910<\/li>\r\n<li>Price after one year (P<sub>t<\/sub>) = \u20b9240<\/li>\r\n<\/ul>\r\n<p>R<sub>t =<\/sub>10\/200 +240-200\/200<\/p>\r\n<p>R<sub>t =<\/sub>0.05 +0.20 =0.25 OR 25%<\/p>\r\n<p>Here, the investor earns <strong><b>5% yield<\/b><\/strong>\u00a0and <strong><b>20% capital appreciation<\/b><\/strong>, totaling <strong><b>25% return<\/b><\/strong>.<\/p>\r\n<p><strong><b>Example 2: Mutual Fund<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Purchase price = \u20b91,000<\/li>\r\n<li>Dividend payout = \u20b940<\/li>\r\n<li>NAV after one year = \u20b91,080<\/li>\r\n<\/ul>\r\n<p>R<sub>t = <\/sub>400\/1000 + 1080-1000\/1000<\/p>\r\n<p>R<sub>t = <\/sub>0.04 + 0.08 =0.12 or 12%<\/p>\r\n<p>The mutual fund provides <strong><b>4% yield<\/b><\/strong>\u00a0and <strong><b>8% capital gain<\/b><\/strong>, totaling <strong><b>12% return<\/b><\/strong>.<\/p>\r\n<p><strong><b>Example 3: Real Estate<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Purchase price = \u20b950,00,000<\/li>\r\n<li>Rental income = \u20b93,00,000 per year<\/li>\r\n<li>Sale price after one year = \u20b955,00,000<\/li>\r\n<\/ul>\r\n<p>R<sub>t<\/sub>\u00a0=3,00,000\/50,00,000 + 55,00,000-50,00,000\/50,00,000<\/p>\r\n<p>R<sub>t<\/sub>\u00a0=0.06+0.10 =0.16 or 16%\u00a0<\/p>\r\n<p>The property generates <strong><b>6% yield<\/b><\/strong>\u00a0and <strong><b>10% capital appreciation<\/b><\/strong>, totaling <strong><b>16% return<\/b><\/strong>.<\/p>\r\n<p><strong><b>Comparative Illustration<\/b><\/strong><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong><b>Asset Type<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Current Yield<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Capital Gain Yield<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong><b>Total Return<\/b><\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Equity Share<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>5%<\/p>\r\n<\/td>\r\n<td>\r\n<p>20%<\/p>\r\n<\/td>\r\n<td>\r\n<p>25%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Mutual Fund<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>4%<\/p>\r\n<\/td>\r\n<td>\r\n<p>8%<\/p>\r\n<\/td>\r\n<td>\r\n<p>12%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Real Estate<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>6%<\/p>\r\n<\/td>\r\n<td>\r\n<p>10%<\/p>\r\n<\/td>\r\n<td>\r\n<p>16%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p><strong><b>Government Bond<\/b><\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p>7%<\/p>\r\n<\/td>\r\n<td>\r\n<p>0%<\/p>\r\n<\/td>\r\n<td>\r\n<p>7%<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>&nbsp;<\/p><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = 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src=\"http:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png\" alt=\"\" width=\"612\" height=\"408\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview.png 612w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/coming-soon-person-g8026473a8_1920-removebg-preview-300x200.png 300w\" sizes=\"(max-width: 612px) 100vw, 612px\" \/><\/p>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 4.1 Concept of Risk Risk and expected return are the two key determinants of an investment decision. Risk, in simple terms, is associated with the variability of the rates of return from an investment; how much do individual outcomes deviate from the expected value? Statistically, risk is measured by any one of &#8230; <a title=\"Learn About Risk &#038; Expected Return From Stock Market Course\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/investment-analysis-course\/risk-expected-return\/\" aria-label=\"Read more about Learn About Risk &#038; Expected Return From Stock Market Course\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":16695,"menu_order":4,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-24993","markets","type-markets","status-publish","format-standard","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24993","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=24993"}],"version-history":[{"count":8,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24993\/revisions"}],"predecessor-version":[{"id":38461,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/24993\/revisions\/38461"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/16695"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=24993"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=24993"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}