{"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\u0026#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 \u0026#038; Expected Return From Stock Market Course"},"content":{"rendered":"\u003cdiv data-elementor-type=\u0022wp-post\u0022 data-elementor-id=\u002224993\u0022 class=\u0022elementor elementor-24993\u0022\u003e\u003csection class=\u0022elementor-section elementor-top-section elementor-element elementor-element-1452744 elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\u0022 data-id=\u00221452744\u0022 data-element_type=\u0022section\u0022\u003e\u003cdiv class=\u0022elementor-container 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data-title-link=\u0022study-tab\u0022\u003e\u003cp\u003e\u003cdiv class=\u0027white\u0027 style=\u0027background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;\u0027\u003e\u003cdiv id=\u0027text_slider\u0027 class=\u0027owl-carousel sa_owl_theme owl-pagination-true\u0027 data-slider-id=\u0027text_slider\u0027 style=\u0027visibility: visible;visibility:visible;\u0027\u003e\u003cdiv id=\u0027text_slider_slide01\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Concept-of-Risk\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch3 style=\u0022text-align: left;\u0022\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003e4.1 Concept of Risk \u003c/span\u003e\u003c/strong\u003e\u003ca href=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg\u0022\u003e\u003cimg fetchpriority=\u0022high\u0022 decoding=\u0022async\u0022 class=\u0022size-full wp-image-16524 aligncenter\u0022 role=\u0022img\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg\u0022 alt=\u0022\u0022 width=\u0022500\u0022 height=\u0022500\u0022 srcset=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 150w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 1024w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 1536w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 2048w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Crypto-portfolio-pana.svg 500w\u0022 sizes=\u0022(max-width: 500px) 100vw, 500px\u0022 /\u003e\u003c/a\u003e\u003c/h3\u003e\u003cp\u003eRisk 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 the measures of dispersion such as co-efficient of range, variance, standard deviation etc\u003c/p\u003e\u003cp\u003eThe risk involved in investment depends on various factors such as:\u003c/p\u003e\u003cul\u003e\u003cli\u003eThe length of the maturity period \u0026#8211; longer maturity periods impart greater risk to investments.\u003c/li\u003e\u003cli\u003eThe credit-worthiness of the issuer of securities \u0026#8211; the ability of the borrower to make periodical interest payments and pay back the principal amount will impart safety to the investment and this reduces risk.\u003c/li\u003e\u003cli\u003eThe nature of the instrument or security also determines the risk. Generally, government securities and fixed deposits with banks tend to be riskless or least risky; corporate debt instruments like debentures tend to be riskier than government bonds and ownership instruments like equity shares tend to be the riskiest. The relative ranking of instruments by risk is once again connected to the safety of the investment.\u003c/li\u003e\u003cli\u003eEquity shares are considered to be the most risky investment on account of the variability of the rates of returns and also because the residual risk of bankruptcy has to be borne by the equity holders.\u003c/li\u003e\u003cli\u003eThe liquidity of an investment also determines the risk involved in that investment. Liquidity of an asset refers to its quick sale ability without a loss or with a minimum of loss.\u003c/li\u003e\u003cli\u003eIn addition to the aforesaid factors, there are also various others such as the economic, industry and firm specific factors that affect the risk an investment\u003c/li\u003e\u003c/ul\u003e\u003cp\u003eAnother major factor determining the investment decision is the rate of return expected by the investor. The rate of return expected by the investor consists of the yield and capital appreciation.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide02\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Concept-of-Return\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch3 style=\u0022text-align: left;\u0022\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003e4.2 Concept of Return\u003c/span\u003e\u003c/strong\u003e\u003ca href=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-amico.svg\u0022\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022size-full wp-image-16525 aligncenter\u0022 role=\u0022img\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-amico.svg\u0022 alt=\u0022\u0022 width=\u0022500\u0022 height=\u0022500\u0022 srcset=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 150w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 300w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 1024w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 1536w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 2048w, https:/www.5paisa.com/finschool/wp-content/uploads/2022/01/Consulting-amico.svg 500w\u0022 sizes=\u0022(max-width: 500px) 100vw, 500px\u0022 /\u003e\u003c/a\u003e\u003c/h3\u003e\u003cp\u003eInvestment is a postponed consumption. Postponement of consumption is synonymous with the concept of \u0026#8216;time preference for money\u0026#8217;. Other things remaining the same, individuals prefer current consumption to future consumption. Therefore, in order to induce individuals to postpone current consumption they have to be paid certain compensation, which is the time preference for consumption. The compensation paid should be a positive real rate of return. The real rate of return is generally equal to the rate of return expected by an investor from a risk-free capital asset assuming a world without inflation. However, in real life, inflation is a common feature of a capitalist economy. If the investor is not compensated for the effects of inflation, the real rate of return may turn out to be either zero or negative. Therefore, the investors, generally, add expected inflation rate to the real rate of return to arrive at the nominal rate of return.\u003c/p\u003e\u003cp\u003eFor example, assume that the present value of an investment is Rs. 100; the investor expects a real time rate of 3% per annum and the expected inflation rate is 3% per annum. If the investor were to receive only the real time rate, he would get back Rs. 103 at the end of one year. The real rate of return received by the investor would be equal to zero because the rime preference rate of 3% per annum is matched by the inflation of 3% per annum. If the actual inflation rate is greater than 3% per annum, the investor would suffer negative returns. Thus, nominal rate of return on a risk-free asset is equal to the time preference real rate plus expected inflation rate.\u003c/p\u003e\u003cp\u003eIf the investment is in capital assets other than government obligations, such assets would be associated with a degree of risk that is idiosyncratic to the investment. For an individual to invest in such assets, an additional compensation, called the risk premium will have to be paid over and above the nominal rate of return.\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide03\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Determinants-of-the-rate-of-return\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch3 style=\u0022text-align: left;\u0022\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003e4.3 Determina\u003c/span\u003e\u003c/strong\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003ents of Rate of Return\u003c/span\u003e\u003c/strong\u003e\u003c/h3\u003e\u003ch3 style=\u0022text-align: left;\u0022\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003e\u003ca href=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-pana.svg\u0022\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022size-full wp-image-16526 aligncenter\u0022 role=\u0022img\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-pana.svg\u0022 alt=\u0022\u0022 width=\u0022750\u0022 height=\u0022500\u0022 /\u003e\u003c/a\u003e\u003cbr /\u003e\u003c/span\u003e\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003cp\u003eThere are three major determinants of the rate of return expected by the investor are:\u003c/p\u003e\u003cul\u003e\u003cli\u003eThe time preference risk-free real rate\u003c/li\u003e\u003cli\u003eThe expected rate of inflation\u003c/li\u003e\u003cli\u003eThe risk associated with the investment, which is unique to the investment.\u003c/li\u003e\u003c/ul\u003e\u003cp\u003eHence, Required return = Risk-free real rate + Inflation premium + Risk premium\u003c/p\u003e\u003cp\u003eIt was stated earlier that the rate of return from an investment consists of the yield and capital appreciation, if any. The difference between the sale price and the purchase price is the capital appreciation and the interest or dividend divided by the purchase price is the yield.\u003c/p\u003e\u003cp\u003eAccordingly,\u003c/p\u003e\u003cp\u003eRate of Return (Rt)= It + (Pt-Pt-1)/ Pt-1\u003c/p\u003e\u003cp\u003eWhere, Rt = Rate of return per time period \u0026#8216;t\u0026#8217;\u003c/p\u003e\u003cp\u003eIt = Income for the period \u0026#8216;t\u0026#8217;\u003c/p\u003e\u003cp\u003ePt = Price at the end of time period \u0026#8216;t\u0026#8217;\u003c/p\u003e\u003cp\u003ePt-1 = Initial price, i.e., price at the beginning of the period \u0026#8216;t\u0026#8217;\u003c/p\u003e\u003cp\u003eIn the above equation \u0026#8216;t\u0026#8217; can be a day or a week or a month or a year or years and accordingly daily, weekly, monthly or annual rates of return could be computed for most capital assets. The above equation can be split in to two components i.e\u003c/p\u003e\u003cp\u003eRate of Return (Rt)= It/Pt-1 + Pt-Pt-1/Pt-1\u003c/p\u003e\u003cp\u003eWhere It/Pt-1 is called the current yield, and Pt-Pt-1/Pt-1 is called the capital gain yield\u003c/p\u003e\u003cp\u003eOr ROR = Current yield + Capital gain yield\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0027text_slider_slide04\u0027 class=\u0027sa_hover_container\u0027 data-hash=\u0027Calculation-of-Return\u0027 style=\u0027padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; \u0027\u003e\u003ch3 style=\u0022text-align: left;\u0022\u003e\u003cstrong\u003e\u003cspan style=\u0022color: #f1566d;\u0022\u003e4.4 Calculation of Return\u003c/span\u003e\u003c/strong\u003e\u003c/h3\u003e\u003cp\u003e\u003ca href=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-pana.svg\u0022\u003e\u003cimg decoding=\u0022async\u0022 class=\u0022size-full wp-image-16526 aligncenter\u0022 role=\u0022img\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2022/01/Consulting-pana.svg\u0022 alt=\u0022\u0022 width=\u0022750\u0022 height=\u0022500\u0022 /\u003e\u003c/a\u003e\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eExample 1-\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eThe following information is given for a corporate bond. Price of the bond at the beginning of the year: Rs. 90, Price of the bond at the end of the year: Rs. 95.40, Interest received for the year: Rs. 13.50. Thus,\u003c/p\u003e\u003cp\u003eRate of return= {13.50 + (95.40-90)}/90= 0.21= 21% per annum\u003c/p\u003e\u003cp\u003eThe return of 21% consists of 15% current yield and 6% capital gain yield.\u003c/p\u003e\u003cp\u003eThere is always a direct association between the rates of return and the asset prices. Finance theory stipulates that the price of any asset is equal to the sum of the discounted cash flows, which the capital asset owner would receive.\u003c/p\u003e\u003cp\u003e\u003cstrong\u003eExample 2-\u003c/strong\u003e\u003c/p\u003e\u003cp\u003eMr. Batra has purchased 100 shares of Rs. 10 each of Kinetic Ltd. in 2005 at Rs. 78 per share. The company has declared a dividend @ 40% for the year 2006-07. The market price of share as on 1-4-2006 was Rs. 104 and on 31-3-2007 was Rs. 128. Calculate the annual return on the investment for the year 2006-07. Dividend received for 2004-05 = Rs. 10 x 40/100 = Rs. 4\u003c/p\u003e\u003cp\u003eCalculation of annual rate of return on investment for the year 2006-07\u003c/p\u003e\u003cp\u003eR = {D1 + (P1-P0)}/ P0= {4+ (128-104)}/ 104= 0.269= 26.9%\u003c/p\u003e\u003cp\u003e\u0026nbsp;\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003cscript type=\u0027text/javascript\u0027\u003ejQuery(document).ready(function()  {jQuery(\u0027#text_slider\u0027).owlCarousel({items  :  1,smartSpeed  :  400,autoplay  :  false,autoplayHoverPause  :  false,smartSpeed  :  400,fluidSpeed  :  400,autoplaySpeed  :  400,navSpeed  :  400,dotsSpeed  :  400,dotsEach  :  1,loop  :  false,nav  :  true,navText  :  [\u0027Previous\u0027,\u0027Next\u0027],dots  :  true,responsiveRefreshRate  :  200,slideBy  :  1,mergeFit  :  true,autoHeight  :  true,mouseDrag  :  false,touchDrag  :  true});jQuery(\u0027#text_slider\u0027).css(\u0027visibility\u0027, \u0027visible\u0027);var  owl_goto  =  jQuery(\u0027#text_slider\u0027);jQuery(\u0027.text_slider_goto1\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  0);});jQuery(\u0027.text_slider_goto2\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  1);});jQuery(\u0027.text_slider_goto3\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  2);});jQuery(\u0027.text_slider_goto4\u0027).click(function(event){owl_goto.trigger(\u0027to.owl.carousel\u0027,  3);});var  resize_24488  =  jQuery(\u0027.owl-carousel\u0027);resize_24488.on(\u0027initialized.owl.carousel\u0027,  function(e)  {if  (typeof(Event)  === \u0027function\u0027)  {window.dispatchEvent(new  Event(\u0027resize\u0027));}  else  {var  evt  =  window.document.createEvent(\u0027UIEvents\u0027);evt.initUIEvent(\u0027resize\u0027,  true,  false,  window,  0);window.dispatchEvent(evt);}});});\u003c/script\u003e\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0022slides-tab\u0022 class=\u0022clearfix eael-tab-content-item \u0022 data-title-link=\u0022slides-tab\u0022\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-11528 size-full\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2021/10/coming-soon-person-g8026473a8_1920-removebg-preview.png\u0022 alt=\u0022\u0022 width=\u0022612\u0022 height=\u0022408\u0022 srcset=\u0022https://www.5paisa.com/marathi/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\u0022 sizes=\u0022(max-width: 612px) 100vw, 612px\u0022 /\u003e\u003c/p\u003e\u003c/div\u003e\u003cdiv id=\u0022videos-tab\u0022 class=\u0022clearfix eael-tab-content-item \u0022 data-title-link=\u0022videos-tab\u0022\u003e\u003cp\u003e\u003cimg loading=\u0022lazy\u0022 decoding=\u0022async\u0022 class=\u0022aligncenter wp-image-11528 size-full\u0022 src=\u0022https://www.5paisa.com/marathi/finschool/wp-content/uploads/2021/10/coming-soon-person-g8026473a8_1920-removebg-preview.png\u0022 alt=\u0022\u0022 width=\u0022612\u0022 height=\u0022408\u0022 srcset=\u0022https://www.5paisa.com/marathi/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\u0022 sizes=\u0022(max-width: 612px) 100vw, 612px\u0022 /\u003e\u003c/p\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e\u003c/div\u003e\u003c/div\u003e\u003c/section\u003e\u003c/div\u003e","protected":false},"excerpt":{"rendered":"\u003cp\u003eStudy 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 … \u003ca title=\u0022Learn About Risk \u0026#038; Expected Return From Stock Market Course\u0022 class=\u0022read-more\u0022 href=\u0022https://www.5paisa.com/marathi/finschool/course/investment-analysis-course/risk-expected-return/\u0022 aria-label=\u0022Read more about Learn About Risk \u0026#038; Expected Return From Stock Market Course\u0022\u003eRead more\u003c/a\u003e\u003c/p\u003e","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}]}}