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PROF. V. RAMACHANDRAN
Operating Environment :
A business operates in an environment not in its
control.
It is exposed to dangers both internal and external
factors.
Stiff and cut throat competition.
Products in storage may : deteriorate or become obsolete
or suffer a fall in prices.
Properties may : be destroyed or stolen.
Customers may fail to pay their dues.
A Finance Manager has to keep all these risks in view and
maintain profitability and liquidity.
Risk and Return
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Expected Returns
Anticipated or expected earnings from an asset over some
future period.
The expected return is subject to uncertainty or risk. And
may or may not occur.
Returns -Components
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Components of Returns
Return basically is made up of two components
Income component
Periodic cash receipts in the form of interest or dividends etc.
includes yield derived from security in relation to its price. For
example: the yield on 10% bond at purchased price of 900(face
value Rs.1000) is 11.11%.
Capital gain or loss component
The appreciation (depreciation) in the price is referred to as
capital gain (or loss) which represents the difference between the
purchase and the sale price of the asset.
The primary objective of many investors is to expect a large
component of capital gain than income component.
Measuring Rate of Return
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X Axis : Return
Y Axis : Probability
Risks
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Un-certainty
It may be defined as the chance of future loss or damage
that can not be foreseen e.g.
Investment in a foreign country may not foresee a coup
and taking over of govt. by an un friendly group.
Loss or destruction of plant on account of natural
calamities like earthquake etc.
Sources of Risk
Interest rate risk
Resulting from changes in level of interest
rates.
Market Risk
Resulting from the variation due to
fluctuations in securities market. The equity
shares get most affected. The risk includes
depression, wars, politics etc.
Inflation Risk
Results from reduction of purchasing power,
affects all securities and also related to
interest rates.
Risks
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Sources of Risk
Business Risk
Industry or environment related and its investors.
Financial Risk
Thank You