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Group D RISK AND THE REQUIRED RATE OF RETURN

This document discusses risk and return fundamentals in finance. It defines risk as the probability of losing an amount from an investment over time, while return is usually presented as a percentage gain relative to the original investment. The relationship between risk and return is that higher risk investments generally offer higher potential returns. Risk can be reduced by diversifying a portfolio across multiple assets. The Capital Asset Pricing Model (CAPM) establishes a linear relationship between risk and expected return, accounting for systematic risk and market returns.

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gellie villarin
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57 views28 pages

Group D RISK AND THE REQUIRED RATE OF RETURN

This document discusses risk and return fundamentals in finance. It defines risk as the probability of losing an amount from an investment over time, while return is usually presented as a percentage gain relative to the original investment. The relationship between risk and return is that higher risk investments generally offer higher potential returns. Risk can be reduced by diversifying a portfolio across multiple assets. The Capital Asset Pricing Model (CAPM) establishes a linear relationship between risk and expected return, accounting for systematic risk and market returns.

Uploaded by

gellie villarin
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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RISK AND THE REQUIRED

RATE OF RETURN
By:
Christopher M. Ataza
Glenah Marie A. Gonzales
Renz Gellie L. Villarin
RISK AND RETURN
FUNDAMENTALS
Christopher M. Ataza
INTRODUCTION:
1. Why risk and return is an important concept in
finance?
- It is necessary to optimize returns, rather than just
investing randomly.
2. What is risk and return analysis?
- In investing, it is essential to evaluate the
performance of the stock, the company and the market.
3. How are risk and return related?
- Financial risk and return has a direct correlation.
RISK
- Is defined as the probability of
losing an amount by an investment
over the given period of time.

• For example:
An investor own shares of
stock in a high risk company and the
company goes bankrupt they likely
lose all their investment.
RETURN
- Is usually presented as a percentage relative to the
original investment over given period of time.
For example:
Assume that an initial investment of P 100.00 that grows
to P 120.00 in one year.
1. Nominal Rate of Return = (120/100)-1 = 20%
*Let us assume that the inflation rate during this one
year period was 3%.
2. Real Rates of Return = 20% - 3% = 17%
RISK AND RETURN IN FINANCIAL
MANAGEMENT
THE RELATIONSHIP BETWEEN THE
RISK AND RETURN
DISCUSSION:
RISK AND RETURN: TREND
ANALYSIS
CONCLUSION:
• Understanding risk and return fundamentals is
essential for making informed investment decisions,
you can build a portfolio that meets your investment
goals while minimizing risk.

THANK YOU!
RISK OF A SINGLE
ASSETS GLEN GONZALES
Risk of a Single Asset
Standalone risk is the risk associated with
a single aspect of a company or a specific
asset. Standalone risk cannot be mitigated
through diversification. Total beta gauges
the volatility of a specific asset on a
standalone basis.
“The higher the risk that you take,
The higher return you received”
Risk of Single Asset
Measurement

Which is the most


riskier in this table?
Risk of Single Asset
Measurement

Investment B is the
most Riskier than
Investment A
Risk of Single Asset
Probability Distribution
Risk of Single Asset
Probability Distribution
RISK OF A
PORTFOLIO
RENZ GELLIE VILLARIN
What is a Investment Portfolio?
A portfolio is the total collection
of all investments held by an
individual or institution,
including stocks, bonds,
real estate, options, futures, and
alternative investments, such as
gold.
Portfolio Risk
Portfolio risk is a term used to
describe the potential loss of
value or decline in the
performance of an investment
portfolio due to various factors,
including market volatility,
credit defaults, interest rate
changes, and currency
fluctuations.
Different Types of Portfolio Risk
Systematic Portfolio Risk (non-diversifiable
risk)
This type of risk comes from
macroeconomic factors like inflation and
changing economic conditions that affect all the
securities in your portfolio and are out of your
control.
UnSystematic Portfolio Risk
(diversifiable risk)
Unsystematic risks, also called specific risks, are
uncertainties of an investment within a particular
firm or industry.
Portfolio Return
Portfolio return can be defined
as the sum of the product of
investment returns earned on
the individual asset with the
weight class of that individual
asset in the entire portfolio. It
Where ∑ni=1 wi = 1
represents a return on the
portfolio and just not on an ● w is the weight of each asset
individual asset. ● r is the return of an asset
Example Computation
Consider ABC Ltd, an
asset management company
, has invested in 2 different
assets along with their
return earned last year. You
are required to earn a
portfolio return.
The Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) describes the


relationship between systematic risk, or the general perils of
investing, and expected return for assets, particularly stocks.It
is a finance model that establishes a linear relationship between
the required return on an investment and risk.

The CAPM is the best-known and most-widely used


equilibrium model of the risk/return (systematic risk/return)
relation.
CAPM Formula and Calculation

Where:

Ra = Expected return on a security


Rrf = Risk-free rate -(certain securities (stocks or bonds) have no risks)
Ba = Beta of the security-the beta of a stock, asset, or investment measures how risky it is)
Rm = Expected return of the market-the average amount investors can expect to make from investments in the market as a whole,
based on historical data
CAPM Example – Calculation of
Expected Return
Here is an example to calculate the required rate of return for an investor to invest in a
company called XY Limited which is a food processing company. Let us assume the beta value
is 1.30. The risk free rate is 5%. The whole market return is 7%.

Risk Free Rate 5% Risk Free Rate

Beta 1.3 Beta


Required Rate of Return is calculated using the formula given below Required Rate of Return
= Risk Free Rate + Beta * (Whole Market Return - Risk Free Rate)

Required Rate of Return 7.6% Required Rate of Return 7.6%


"Given a 10% chance of a 100 times payoff,
you should take that bet every time."

— Jeff Bezos
Fin.

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