CO N C E PT

A N D
TY P E S O F
R I S K A N D
R E T U R N
MEANING OF RISK, RISK-
R E T U R N T R A D E - O F F,
CAPM AND VALUATION
 Few questions of
investors
• Will it be safe to make investments in
securities of other companies?
• What is the maximum benefits that one
can drive from these investments?
• What types of securities are more
beneficial, debt or equity?
• Which type of security one should buy?
• What are the growth trends followed by
these securities? Whether they always do
grow, or decline sometimes?
 INTRODUCTION

Every financial decision has two aspects these are

risk and return as these are the two main
determinants of security prices. They have their
impact on the share prices as well as the valuation of
firm. Every decision involves some degree of risk, so
an investor must take his financial decision
rationally to optimize his returns through the
calculations of risk and return. Decision making of
any kind involves both positive and negative
aspects.
 Return

Return is associated with gain or loss on money invested in the

market.
The rate of return on a security is the annual income received
plus any change in the market price of an asset.
Return is required to maximize the market price of the share, but
return is associated with risk because the greater the return,
higher the expectation of risk.
Govt securities have a low risk as they provide stable return but
at very low rate. Thus, the investor must pay the price in term of
loss of return to invest in safe securities having minimum risk.
 Since investment decision is based
on future estimated returns which
are exposed to different kinds of
risk, so forecasts cannot be made
with certainty. Thus Risk and
returns are closely related. A
Risk profitable investment may also be
very risky. So an investor has to
manage a trade off between risk
and return.
 CONCEPT OF RISK
Risk may be understood as the
possibility of adverse happening. We
consider those situations as risky, if
they involve larger deviations from
the expectations. Whether a
particular situation involves risk or
not depends on with what precision
we can estimate the possibility of
occurrence of a particular event
This gives raise to the following three states of
possibilities

A. Certainty B. Uncertainty C. Risk

Certainty is a situation reflecting
the happening of a particular
event as expected with zero
deviation. In case of certain ‘All
Truths’, there will be no deviation.
Like the sun rising in the east and
inevitability of death. Similarly,
there may be some business
situations involving near
certainty. Expecting to sell a
certain number of bags of rice in a
locality, when you are a
monopolists and rice is the staple
food of the people of the locality.
Uncertainty is a situation that makes
prediction difficult. One may not be sure
of the occurrence of a particular event
with any degree of precision. People find
it often difficult to make predictions
pertaining to weather. So also, the
meteorological department, sometimes.
To attempt to define uncertainty with any
rigor presents extremely complex and
hazardous conceptual and mathematical
problems. In practice also, it is difficult to
deal with the situations of uncertainty,
since nothing stands to prediction.
The third state of
possibility, i.e., risk, is
said to be a situation
lying in between the
above two states, viz.,
certainty and
uncertainty. This can be
best understood in the
form of a continuum
with certainty and
uncertainty on the two
ends and risk covering
the middle ground.
 Risk refers to chance of loss or
uncertainty of occurrence of returns

Possibility of an adverse deviation of

expected income
CHARACTERISTICS OF
RISK
Risk is measured with the help of
statistical technique (probability)

Risk creates both problems and

opportunities for the business
 Ex-ante and Ex-Post Risk
Risk, as a concept, has both ex-ante and ex-post
meaning.
Ex-ante risk refers to a decision variable
reflecting the probability of realizing unfavorable
outcomes in the future as a result of a decision
made currently. Ex post risk refers to observed
variation in outcomes during prior periods. This
risk is historical. The estimation and evaluation
of future outcomes, based on current
information, is the most difficult exercise
involved in financial decision making. Finance
literature considers the ex-ante concept of risk as
having greater value than the ex-post concept of
risk, since it is the former that a finance manager
confronts.
 CONCEPT OF RETURN
Return is something received
back. In the field of financial
decision making the manager
invests the company’s money
on diverse fixed and current
assets and hopes to receive
something back on his
investment.
 Return
measurement
Securities provide returns in the form of
• Dividends
• Interests. (rate of return for the lender)
• capital gain. (and it also provides a return at the time
of sale)
The term ‘return’ has several dimensions, as of the
following

(ii) Single
(i) Book Vs. period Vs.
Market Return Multi period
Return

(iii) Ex-ante
(expected) Vs. (iv) Security
Ex post Vs. Portfolio
(Realized) Return
Return
 Book Vs. Market Return
Book return is the return calculated from the
books of the company using profits and assets.
Normally, the return on assets (ROA) is taken as
the indicator of book return. Several other return
calculations can also be made using other
variables like capital employed, net worth, capital
invested, earnings per share and dividends per
share. In all these cases, these returns reflect
historical performance. Whereas, market return is
based on the market values of the assets.
Single period Vs. Multi period Return
Return is always computed with reference to a particular period. If an
investment of Rs.100 earns an income of Rs.3 over a three month period,
the rate of return is 3 per cent. If another investment earns an income of
Rs.3 over a 12-month period, then also the return is 3 per cent. But the
measures appear to be illogical, unless they are related to a specific time
period. Normally, rates of return are computed on an annual basis.

Return on investment will be earned during a calendar

interval, which may or may not be the same as the time
period used to specify the rate of return.
Ex-ante Vs. Ex post Return

Ex-ante means before the fact, whereas

ex-post means after the fact. There is Whereas, the ex post return is the actual
significant difference in these two, as far or realized return. In the event of bullish
as security returns are concerned. An ex- or bearish conditions prevailing in the
ante return is the one that an investor markets, the gap between the expected
hopes to get from his investment. There is return and actual return may be very
no guarantee that what the investor has wide.
hoped for would come true.
 Security Vs. Portfolio return
This is with reference to the
investment in a single asset/security
against a group of assets/securities.
Whatever be the security, whether it
is debentures, preference shares or
equities, the procedure for valuation
can be common.
 Systematic risk
TYPES OF
RISK
Unsystematic
risk
TYPES
OF
RISKS
 Systematic risk
Systematic risk is due to the broad spectrum of
uncontrollable risk associated with the business activities
within a country.
It generates out of macroeconomic environmental factors
such as demand, supply, inflation, change in interest rates,
and change in government policies(reduction of corporate
tax, Regulations, Subsidies) backed by sociological and
political factors in a country.
It is an uncontrollable risk as these forces are beyond the
control of any individual and thus cannot be minimized by a
single firm. They have their strong influence on the market
conditions. Such risks are called market risk and interest risk
and purchasing power risk. These risks affect the cash
inflows of a project. The changes in cash inflows will also
bring about change in the profitability of an investment
proposal.
 It is a macro in nature as it
Systematic risk is due to the
affects a large number of
influence of external factors on
organizations operating under a
an organization. Such factors are
similar stream or same domain.
normally uncontrollable from an
It cannot be planned by the
organization's point of view.
organization.
We are aware that variation in the returns is
caused by various controllable and uncontrollable
factors.
Systematic risk refers to that portion of total
variability in returns caused by factors external to
the investor, such as changes in the economic,
political and social conditions.
The effect of these changes would be near uniform
on the assets dealt in the market. It is common
that when economic conditions are bright,
indicating a steep growth in the GDP, falling
inflation and rising incomes, the prices of the
securities also go high reflecting the sentiments of
the economy. Reverse occurs when the economy
shows signs of recession.
 Interest-rate risk arises due
to variability in the interest
1. Interest rates from time to time. It
rate risk particularly affects debt
securities as they carry the
fixed rate of interest.
1.Price risk and
2.Reinvestment rate risk.

3.Price risk arises due to the

possibility that the price of the
shares, commodity, investment,
etc. may decline or fall in the
future.
4.Reinvestment rate risk results from
fact that the interest or dividend
earned from an investment can't be
reinvested with the same rate of
return as it was acquiring earlier.
 Market risk is associated
with consistent
fluctuations seen in the
trading price of any
shares or securities. That
is, it arises due to rise or
fall in the trading price of
listed shares or securities
2.Market risk in the stock market.
 Non-
Relative Directional Basis risk Volatility
directional
risk risk and risk.
risk
1. Relative risk is the assessment or evaluation of risk at
different levels of business functions. For e.g. a
relative-risk from a foreign exchange fluctuation may be
higher if the maximum sales accounted by an
organization are of export sales.
2. Directional risks are those risks where the loss arises
from an exposure to the particular assets of a market.
(continuous loss) For e.g. an investor holding some
shares experience a loss when the market price of
those shares falls down.
3. Non-Directional risk arises where the method of trading
is not consistently followed by the trader. For e.g. the
dealer will buy and sell the share simultaneously to
mitigate the risk
4. Basis risk is due to the possibility of loss arising from
imperfectly matched risks. For e.g. the risks which are
in offsetting positions in two related but non-identical
markets.
5. Volatility risk is of a change in the price of securities as
a result of changes in the volatility of a risk-factor. For
e.g. it applies to the portfolios of derivative instruments,
where the volatility of its underlying is a major influence
of prices.
 Purchasing power risk is
also known as inflation risk.
It is so, since it emanates
(originates) from the fact
that it affects a purchasing
power adversely. It is not
3. Purchasing desirable to invest in
power or securities during an
inflationary risk inflationary period.
Demand inflation risk arises due to
Cost inflation risk arises due to
increase in price, which result from an
sustained increase in the prices of
excess of demand over supply. It occurs
goods and services. It is actually
when supply fails to cope with the
caused by higher production cost. A
demand and hence cannot expand
high cost of production inflates the
anymore. In other words, demand
final price of finished goods consumed
inflation occurs when production
by people.
factors are under maximum utilization.
 Unsystematic risk

Unsystematic risk is a unique risk

related to the company pertaining to
the behavior pattern or internal
influence of a firm like the problems
relating to management, staff,
expenses, losses, strikes and other
issues directly affect the company’s
own operations. These are controllable
risks and thus can be minimized by
diversification of investment portfolio
 B. Unsystematic Risk

•Unsystematic risk is due to the influence of

internal factors prevailing within an
organization. Such factors are normally
controllable from an organization's point of
view.
•It is a micro in nature as it affects only a
particular organization. It can be planned, so
that necessary actions can be taken by the
organization to mitigate (reduce the effect of)
the risk.
1. Business or liquidity risk

Business risk is also known

as liquidity risk. It is so, since
it emanates (originates) from
the sale and purchase of
securities affected by
business cycles,(expansion
or boom, recession,
depression, recovery),
technological changes, etc.
•Asset liquidity risk
is due to losses arising from an
inability to sell or pledge assets at,
or near, their carrying value when
needed. For e.g. assets sold at a
lesser value than their book value.
•Funding liquidity risk
exists for not having access to the
sufficient-funds to make a payment
on time. For e.g. when commitments
made to customers are not fulfilled
as discussed in the SLA (service level
agreements).
2. Financial or credit risk

Financial risk is also known as credit risk. It

arises due to change in the capital
structure of the organization. The capital
structure mainly comprises of three ways
by which funds are sourced for the
projects.
These are as follows:
•Owned funds. For e.g. share capital.
•Borrowed funds. For e.g. loan funds.
•Retained earnings. For e.g. reserve and
surplus.
•Exchange rate risk is also called as exposure rate risk. It is
a form of financial risk that arises from a potential change
seen in the exchange rate of one country's currency in
relation to another country's currency and vice-versa. For
e.g. investors or businesses face it either when they have
assets or operations across national borders, or if they
have loans or borrowings in a foreign currency.
•Recovery rate risk is an often-neglected aspect of a credit-
risk analysis. The recovery rate is normally needed to be
evaluated. For e.g. the expected recovery rate of the funds
tendered (given) as a loan to the customers by banks, non-
banking financial companies (NBFC), etc.
•Sovereign risk is associated with the government. Here, a
government is unable to meet its loan obligations,
reneging (to break a promise) on loans it guarantees, etc.
•Settlement risk exists when counterparty does not deliver
a security or its value in cash as per the agreement of trade
or business.
3. Operational risk
Operational risks are the
business process risks failing
due to human errors. This
risk will change from industry
to industry. It occurs due to
breakdowns in the internal
procedures, people, policies
and systems.
 Model risk
is involved in using various models to value financial securities. It is due to
probability of loss resulting from the weaknesses in the financial-model used in
assessing and managing a risk.
• Failure mode and effects analysis(FMEA)
• Hazard analysis and critical control points(HACCP)
• Fault tree analysis(FTA)
• Event tree analysis(ETA)
• Bowtie Analysis
• Preliminary Hazard Analysis(PHA)
• Layer Of Protection Analysis(LOPA)

People risk
Arises when people do not follow the organization’s procedures,
practices and/or rules. That is, they deviate from their expected
behavior.
Legal risk
Arises when parties are not lawfully competent to enter an agreement
among themselves. Furthermore, this relates to the regulatory-risk,
where a transaction could conflict with a government policy or
particular legislation (law) might be amended in the future with
retrospective effect.

Political risk
occurs due to changes in government policies. Such changes may have
an unfavorable impact on an investor.
 MEASURES OF RISK
Since risk is variability in the expectations, there are many
statistical tools that can be employed to measure risk. The
following are the usual statistical techniques that are relied upon.

1. Sensitivity Analysis
2. Probability Distribution
3. Standard Deviation (SD)
4. Coefficient of Variation (CV)
5. Skewness (Sk)
The risk associated with a security
from both a behavioral and a
quantitative/statistical point of
view.
Different techniques are available
to measure these different risks.
The behavioral view of risk can be
measured by using sensitivity
analysis and probability
distribution.
The statistical measures of risk of a
security are standard deviation and
Sensitivity Analysis
It is a behavioral approach to assess risk by
considering a number of possible return
estimates so that a sense of variability among
outcomes can be measured.
In order to have a sense of variability among
return estimates, a possible approach is to
estimate.
The greater range indicates the more variability
of the asset.
 Probability distribution

The risk associated with an asset can be assessed more

accurately using probability distribution than sensitivity
analysis.
It is a model that relates probabilities to the associated
outcomes. The probability of an outcome represents the
likelihood/percentage chance of its occurrence.
An outcome which has a probability of zero indicates that
this outcome will never occur. Based on the probabilities
assigned to the rate of return, the expected value of the
return can be computed which is the weighted average of all
possible returns multiplied by their respective probabilities.
Thus, probabilities of the various outcomes are used as
weights. The expected return.
E (R) = Σ [P(r) x r]
Where: E (R) = Expected return
P (r) = Probability of a particular value of return
r = return
Σ = sum of all possible outcomes
 Risk refers to the dispersion of returns around an expected value. The most
common statistical measure of risk of an asset is the standard deviation
from the mean /expected value of return. It represents the square root of
the average squared deviations of the individual returns from the expected
returns, symbolically the standard deviation

σ = √∑n i=1 (𝑅𝑖 − 𝑅𝑒) 2 ∗ 𝑃ri

Standard
deviation
where σ = Standard Deviation of Returns Re=
Expected Return Ri= Return for the ith
possible outcome Pri=probability associated
with its return N=number of outcomes
considered.
The greater standard deviation of
returns indicates the greater
variability/dispersion of returns
and the greater risk of the
investment. It is the absolute
measure of dispersion and does
not consider the variability of
return in relation to the expected
value.
 It is a measure of relative dispersion used in comparing the risk of assets
with differing expected returns. It is a measure of risk per unit of expected
return. It converts standard deviation of expected values into relative
values to enable comparison of risks associated with assets having
different expected values. The coefficient of variation is computed by
dividing the standard deviation for an asset by its expected value.

Coefficient
of variation CV= σr/Re Where CV= Coefficient of variation σr =
Standard deviation of return

Re = Expected Return The larger CV is associated with the

larger relative risk of the asset. The use of coefficient of
variation for comparing asset risk is the best since it
considers the relative size (expected value) of assets.
 Skewness (Sk)

Skewness tells us about the symmetry of the data. Sometimes, a

given data of two distributions may produce same mean and the
same standard deviation. But the data may differ in terms of the
shape of distribution. If a given data are not symmetrical, it is called
asymmetrical or skewed. Higher skewness implies higher dispersion.
In skewness, there are two possibilities, of data being:
(i) Positively skewed and;
(ii) Negatively skewed.
Positive skewness implies that there is less likelihood of returns
being lower than the mean.
Whereas, negative skewness implies higher deviations from the
mean. Therefore, positive skewness is considered less risky.
RISK-RETURN CALCULATION
Capital Asset Pricing Model (CAPM)
According to CAPM, there is an implied
equilibrium relationship between risk and return
for each security. Under the conditions of market
equilibrium, a security is expected to provide a
return commensurate with its unavoidable risk.
The greater the unavoidable risk of a security, the
greater the return that investors will expect from
the security. The relationship between the
expected return and unavoidable risk and the
valuation of securities is the essence of CAPM.
Stated in other words, “the risk averse investors
will not hold risky assets, unless they are
adequately compensated for the risks, they bear”
The capital asset pricing model is an
equilibrium model of the trade off
between expected security return and
systematic risk which is unavoidable.
It is the basic theory that links together
risk and return of all assets and also
explains how the security prices are
calculated in the marketplace. It
provides the framework for
determining the equilibrium expected
return for risky securities by deriving
the relationship between expected
return and systematic risk of individual
securities and portfolios.
 Risk returns relationship
Identification of under
for an efficient portfolio
and over-valued assets
as well as for an
traded in the market.
individual security.

Implications Pricing of asset not yet

Effect of leverage on cost
of equity (rate of return

CAPM
traded in the market. required by equity
shareholders)

Capital budgeting Risk of firm through

decisions and cost of diversification of project
capital. portfolio.
 Assumptions of the Model

1. Investors Make 2. An Individual 3. Investors Can 5. There Are No 6. There Is No

Their Decisions Investor Cannot Lend Or Borrow Transaction Personal
Only On The Basis Influence The Funds At The Costs Involved Income Tax. It
Of The Expected Price Of A Stock Riskless Rate Of
Return, Risk
On Buying And Implies That
In The Market. Interest. Selling Of The Investor Is
Associated With
The Security. Stocks. Indifferent
4. Assets Are Between
Infinitely Capital Gain
Divisible. And Dividend
The market price of share is influenced
by systematic and unsystematic risk.
The CAPM approach measures the
systematic risk of the security. Such a
risk is measured by beta which
measures change in market value of
equity shares relative to change in
market index. If beta is high the
company’s share will have high risk.
 Elements of the model

The CAPM consists of two elements: The Capital Market Line (CML) and the Security
Market Line (SML). The Capital Market Line (CML)- It represents the risk return
relationships for efficient portfolios.
It depicts the risk return relationships for efficient portfolio available to investors.
It also shows that the appropriate measure of risk for an efficient portfolio is the
standard deviation of return on the portfolio.
The Security Market Line (SML)- It is a graphic depiction of CAPM and describes the
relationship between expected return and systematic risk in capital markets.
The risk averse investors seek risk premium to assume the risk embedded in risky
assets. Systematic risk which is unavoidable is the contribution of an individual
asset to the risk of market portfolio. According to the capital market theory, the
market compensates or rewards for systematic risk only as unsystematic risk can be
eliminated by diversification. The level of systematic risk in an asset is measured by
the beta coefficient β. The CAPM links beta to the level of required return.
 Where E(ri)= expected or required
rate of return on asset i rf= risk
Expected return= risk free free rate of return, vertical axis
return+ (Beta*Risk premium of intercept β= Systematic risk of the
market) E(ri)= rf+ β(E(rm)-rf) asset, beta E(rm)= expected
return on market portfolio. E(rm)-
rf= Risk premium of market
 Risk-Return relationship(elements required
to apply CAPM model)

In the CAPM, the expected return on an asset

varies directly with its systematic risk and the
risk premium of market portfolio which is a
reward depending on the level of risk free return
and return on the market portfolio. In other
words, the risk premium for an asset or portfolio
is a function of its beta i.e. the risk premium
added to the risk free rate is directly proportion
to beta. Thus the three basic elements required
to apply CAPM model are: risk free rate, risk
premium on market portfolio and beta.
 Risk free rate
The rate of return available on
an assets like T- bills, money
market funds or bank deposits
is taken as the proxy for risk
free rate as such assets have
very low or virtually negligible
default risk and interest rate
risk. However under
inflationary conditions, they are
risk less in nominal terms only.
In fact, real return (nominal
return inflation rate) may
become zero, even negative
when inflation wakes up
Risk premium on market portfolio
The risk premium on market
portfolio(combination of markets) is the
difference between the expected return
on the market portfolio and the risk free
rate of the return. The CAPM holds that
in equilibrium the market portfolio is the
unanimously desirable risky portfolio. It
contains all securities in proportion to
their market value. In the efficient
portfolio, which enables neither lending
and borrowing, the risk premium on the
market portfolio is proportional to its
risk and the degree of risk aversion of
the average investor.
 Beta measures the risk (Volatility)
of an individual security relative to
market portfolio.

Beta Thus, the beta of the market portfolio is one.

This classifies all other market portfolios and
securities in the two risky classes. Securities
with beta less than one are called defensive
security. Security with beta greater than one is
called aggressive security. Risk free security has
a beta equal to zero.
 Validity of CAPM
The CAPM is a rigorously derived equilibrium model. It has been
widely used on the basis of four factors.
First, the risk return trade off- the direct proportional relationship
between the two- has a distinct intuitive appeal.
Second the transition from the capital market line to the security
market line shows that the undiversifiable nature of the
systematic risk makes it the relevant risk for pricing of securities
and portfolios.
Third the beta- the measures of systematic risk is easy to
compute and use.
Finally, the model shows that investors are content to put their
money in a limited number of portfolios, namely, a risk-free asset
like Treasury bills and a risky asset like a market index fund.
However, the CAPM is essentially a single factor model in that the
security’s expected return depends on a single factor namely
beta. But there may be other factors, apart from beta which may
affect required returns. Therefore, the inclusion factors like taxes,
inflation ,liquidity, market capitalization size and price earnings
in the CAPM equation would provide better explanation of
variables impacting security returns which have been used in the
extended CAPM model to overcome the shortcomings of CAPM
 Arbitrage pricing theory is one of the tools
used by the investors and portfolio
managers. The capital asset pricing theory
explains the returns of the securities on
the basis of their respective betas.
According to the previous models, the
investor chooses the investment on the
Arbitrage Pricing basis of expected return and variance. The
alternative model developed in asset
Theory pricing by Stephen Ross is known as
Arbitrage Pricing Theory. The APT theory
explains the nature of equilibrium in the
asset pricing in a less complicated manner
with fewer assumptions compared to
CAPM.
 Arbitrage is a process of earning profit by
taking advantage of differential pricing for
the same asset. The process generates
riskless profit. In the security market, it is
of selling security at a high price and the
simultaneous purchase of the same
security at a relatively lower price. Since
the profit earned through arbitrage is
Arbitrage riskless, the investors have the incentive
to undertake this whenever an
opportunity arises. In general, some
investors indulge more in this type of
activities than others. However, the buying
and selling activities of the arbitrager
reduces and eliminates the profit margin,
bringing the market price to the
equilibrium level.
 The assumptions:

3. Perfect competition
1. The investors have 2. The investors are
prevails in the market
homogenous risk averse and utility
and there is no
expectations. maximisers.
transaction cost.
 The APT theory does
not assume

(3) investors can (4) the selection of

single period borrow and lend at the portfolio is based
(2) no taxes
investment horizon risk free rate of on the mean and
interest variance analysis.
 Risk-return trade off is the kingpin of entire
financial decision making. Investors compare
return to the amount of risk they undertake. A
systematic comparison of this risk and return
could be possible only when we are able to
measure the risk in precise terms. This leads us to
know the nature of risk and its types. Basically, risk
is divided into two types as: systematic risk and
unsystematic risk. Systematic risk refers to that
portion of total variability in returns caused by
Risk-return trade factors external to the investor; such as changes in
off the economy, political system and social
conditions. Systematic risk is again caused by
three factors, viz., market risk, interest rate risk and
purchasing power risk. While unsystematic risk is
caused by controllable actors like the policies of
the company. The contribution of CAPM led to the
estimation of relationships between risk and
return. The model also has given a good measure
of systematic risk. Improvements in the CAPM
model have been suggested leading to the
Arbitrage Pricing Theory.
 SUMMARY
Return is associated with gain or loss on money invested in the market. The rate of
return on a security is the annual income received plus any change in the market
price of an asset.
Thus Risk and returns are closely related. A profitable investment may also be very
risky. So an investor has to manage a trade off between risk and return. The
variability of the actual return from the expected returns associated with the given
asset is defined as a risk. Systematic risk is due to the broad spectrum of
uncontrollable risk associated with the business activities within a country.
It generates out of macroeconomic environmental factors such as demand, supply,
inflation, change in interest rates, and change in government policies backed by
sociological and political factors in a country. Unsystematic risk is a unique risk
related to the company pertaining to the behavior pattern or internal influence of a
firm like the problems relating to management, staff, expenses, losses, strikes and
other issues directly affect the company’s own operations. The risk associated with a
security from both a behavioral and a quantitative/statistical point of view.
Different techniques are available to measure these different risks. The behavioral
view of risk can be measured by using sensitivity analysis and probability
distribution In the CAPM, the expected return on an asset varies directly with its
systematic risk and the risk premium of market portfolio which is a reward
depending on the level of risk free return and return on the market portfolio
 ASSESSMENT QUESTIONS
• 1. Define the concept of Return.
• 2. Define the concept of Risk.
• 3. What factors to cause variations in Return and risk.
• 4. What are the various statistical techniques available to
measure risk
• 5. Explain in brief the ideas of Arbitrage Pricing Theory