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I would like to thank my respected teacher RANJANA MA’AM for

assigning such a relevant topic. Her guidance made me work in a better

way and put together the project in this form.

I would then like to thank our HOD Dr. RUCHI SINGH for addressing
to our problems and scheduling our tests in such a way that it doesn’t
hinder our progress with the assignments.

I would next like to thank my parents for their constant support to me.

I would also like to thank everyone who is in someway or the other

associated with my assignment.

Thank You

Harshita Shukla
Roll No.:18

1. Pure v/s Speculative:

Pure Risk: The situation in which a gain will not occur. The
best possible outcome is that of no loss occurring.

Speculative Risk: A risk in which either a gain or a loss may

E.g.: You commit to sell a bag of wheat 3 months into the
future at Rs.1000. Three months down if the price of wheat is
Rs.500 you make a profit of Rs.500; if it is Rs.1500, you incur
a loss of Rs.500 by not being able to sell it at the market price.
You speculated on the price of wheat 3 months into the future

2. Diversifiable v/s Non-diversifiable:

Essentially diversifiable risk is that which can be mitigated

through a process of pooling risks. Vice versa for non-

E.g.: This is best exemplified through the theory of portfolio

diversification. Buying one stock (portfolio of 1 stock)
exposes you to 2 types of risk. Risk of the market (Systematic
risk) and risk of the firm specific stock (Non-systematic risk).
Increasing the number of stocks in your portfolio would be a
form of pooling that mitigates non-systematic risk of the whole
portfolio. But the portfolio is implicitly exposed to the
systematic risk of the market.

Risk adverse individuals tend to be willing to pay the expected

value of the loss rather than face the risk of the loss. This can
be explained by the fact that the value of the loss, if incurred,
is greater than the amount sacrificed by the individual to cover
that loss.

Risk analysis is the process of defining and analyzing the

dangers to individuals, businesses and government agencies
posed by potential natural and human-caused adverse events. In
Information Technology, a risk analysis report can be used to
align technology-related objectives with a company's business
objectives. A risk analysis report can be either quantitative or


Quantitative Risk Analysis is the process for numerically analyzing the

effect on overall project objectivities of identified risks. On the base of
the results of the Qualitative Risk Analysis the "Quantitative Risk
Analysis is performed on risks that have been prioritized and analyses
the effects of those risks events and assigns a numerical rating to those
risks". Instead of estimating the single impacts by using a raw typology
in the process of Quantitative Risk Analysis the impacts to the whole
project will be made computable and will be computed for generating a
more elaborated total ranking.It breaks down risks from a high medium
low ranking to actual numerical values and probabilities of occurrence"
for being able to compute the overall effects.

Qualitative Risk Analysis is the process for prioritizing risks for further
analysis or action by assessing and combining their probability of
occurrence and impact.

Qualitative Risk Analysis assesses the priority of identified risks using

their probability of occurring, the corresponding impact as well as other
factors such as the time frame and risk tolerance.Naturally this
evaluation uses the definitions of the risk management plan. The
Qualitative Risk Analysis is a qualitative risk analysis (and not a
quantitative risk analysis) because single risks are "manually" classified
by raw types of impacts and probability (and not by really computed
values with respect to the whole project and the side effects of other
Returns are of two types:

1.Realized return: The return that is ex-post in nature i.e. the investor
wishes to receive a certain return and does receive it too.

2. Expected return: A certain return is hoped to be received by the

investor on a particular investment.

An investment is the current commitment of funds done in the
expectation of earning greater amount in future. Returns are subject to
uncertainty or variance Longer the period of investment, greater will be
the returns sought. An investor will also like to ensure that the returns
are greater than the rate of inflation.

An investor will look forward to getting compensated by way of an

expected return based on 3 factors -

• Risk involved
• Duration of investment [Time value of money]
• Expected price levels [Inflation]

The basic rate or time value of money is the real risk free rate [RRFR]
which is free of any risk premium and inflation. This rate generally
remains stable; but in the long run there could be gradual changes in the
RRFR depending upon factors such as consumption trends, economic
growth and openness of the economy.

If we include the component of inflation into the RRFR without the risk
premium, such a return will be known as nominal risk free rate [NRFR]

NRFR = (1 + RRFR) * (1 + expected rate of inflation) - 1

Third component is the risk premium that represents all kinds of

uncertainties and is calculated as follows -

Expected return = NRFR+ Risk premium

In our analysis we see how assets with different payout structures can be
compared. General utility theory suggests that the average investor is
risk averse. Given the same expected return of two assets with different
risks, he would prefer the one with less risk. ). For an asset with
uncertain cash flows and payoffs, which are normally distributed, the
mean of the distribution will be the expected return while the standard
deviation forms some kind of “risk”. Choosing the “less risky” asset
therefore comes down to choosing the asset with the lowest standard
deviation in its payout distribution.

An investor could also approach the problem from the other direction,
choosing among assets with the same risk and then choose the asset with
the highest expected return.

After he analyses what is to be done, he makes a correct and appropriate

decision. Thus risk and return analysis is of great use in the financial
decision making and must always be carried out to stay on a profitable




Risk is essentially, the probability that the outcome maybe

damaging or result in a loss. With risk, the outcomes of an
event are thrown open to uncertainty. Tossing a dice is at a
basic level a risky endeavor that has uncertain outcomes.

Return expresses the amount which an investor actually earned on an

investment during a certain period. Return includes the interest, dividend
and capital gains; while risk represents the uncertainty associated with a
particular task. In financial terms, risk is the chance or probability that a
certain investment may or may not deliver the actual/expected returns.

Analyzing both of these to maximize the value of the latter is the prime
objective of risk and return analysis.