Investors always make investment in expectation of

return. But return is always subjected to the risk attached. Risk arises whenever the actual return is different from the expected return. so to understand risk it is essential to understand concept of risk and return

 Basic motivating force and principal reward in

investment process. Defined in 2 terms : REALISED RETURN and EXPECTED RETURN. Return can be measured as the total gain or loss to holder over a period of time and defined as percentage return on initial amount of invested.

 Risk in investment analysis means future returns are

unpredictable. It refers to chance that actual return will differ from expected return. More simpler it is variation in return. risk is different from uncertainty :risk is a situation where possibility of happing and non happing of event can be measured but incase of uncertainty possibility cannot be measured

1. 2.

MARKET RISK INTREST RATE RISK

3.
4. 5.

INFLATION RISK
BUSSINESS RISK FINANCIAL RISK

 On the basis of sources of risk in investment risk is

classified as: i. systematic risk ii. Unsystematic risk

 MEANING: It refers to that portion of variability

in return which is caused by factors affecting all firms. FCATORS: money supply, inflation, recession , interest rate policies, tax rate etc. NATURE: non-diversifiable , external and uncontrollable.

 MEANING: It represent the fluctuation in return due to

factors which are specific to particular firm or market. FACTORS: Are called as firm specific. NATURE: Diversifiable, controllable and internal

SOURCES
MARKET RISK INFLATION RISK INTREST RATE RISK BUSSINESS RISK FINANCIAL RISK

NATURE

TYPE

EXTERNAL SYSTEMATIC RISK UNCONTROLABLE EXTERNAL SYSTEMATIC RISK UNCONTROLABLE EXTERNAL SYSTEMATIC RISK UNCONTROLABLE INTERNAL CONTROLABLE INTERNAL CONTROLABLE UNSYSTEMATIC RISK UNSYSTEMATIC RISK

 Statistical measures can be used to make measurement

of risk more precise. Measures are: RANGE STANDARD DEVIATION BETA

 RANG:
It is difference between highest and lowest expected

return. For eg: the return from investment fluctuate between 20% to 25%. Therefore rang is 25%-20%= 5%

 Reliable and convenient way to quantify risk.

To measure the degree of spread possible returns around

the expected return. standard deviation= SD= p (xr)

Returns(x) 20 21 22 23 24

Probability(p) .15 .10 .60 .10 .05 1

P *x 0.03 0.021 0.132 0.023 0.012 r=21.8%

(x-r) 3.24 0.64 0.04 1.44 4.84

p(x-r) .486 .064 .024 .144 .242 0.96

SD= p (xr) 0.96 = 0.9798

 INVESTMENT DECISION:
HIGH RISK
HIGH RETURN LOW RETURN MAY BE NO INVESTMENT

LOW RISK
DEFINITE MAY BE

 BETA () measures the risk of one security/portfolio in

relation to market risk. Market risk is variation in benchmark market index.

Beta <1 =1 >1

RISK LESS EFFICIENT MORE