F I N A N C I A L P L A N N I N G
Risk, Return &
Investment
Analysis
Evaluating performance through Return metrics, IRR, CAGR & Real Returns
Financial Planning Presentation
Group Members
Roll No. Name
HTBVOWM003 Meet Bohara
Topics Covered
Risk–Return Relationship Effective Rate of Return
01 04
Understanding the fundamental trade-off Accounting for compounding frequency
Calculation of Returns IRR & CAGR
02 05
Formulas & worked examples Internal rate & compounded growth
Nominal Rate of Return Real Rate of Return
03 06
Definition & application Inflation-adjusted performance
01 · Risk–Return Relationship
Risk–Return Frontier Government Bonds
Core Principle
Expected Return (%) Return: 3–5% | Risk: Low
30
Corporate Bonds
25 Return: 5–8% | Risk: Low-Med
Higher Risk
→ Higher Poten al Return Expected Return (%) 20
Mutual Funds/ETFs
Investors require compensation for 15 Return: 8–12% | Risk: Medium
uncertainty.
• Low Risk: Govt bonds, FDs 10 Equities/Stocks
• Medium: Mutual funds, ETFs Return: 12–18% | Risk: High
• High Risk: Stocks, crypto 5
0 Crypto/Derivatives
0% 5% 10% 15% 20% 25% Return: 20%+ | Risk: Very High
Risk (Std Deviation)
02 · Calculation of Returns
Formula:
Return (%) = [ (Ending Value − Beginning Value + Dividends) / Beginning Value ] × 100
📈 Worked Example Returns by Asset Class (%)
Absolute Return
20 18
18 Total gain/loss, no time factor
16
Buy Price: ₹500 14 13
Sell Price: ₹650 12 Annualised Return
Dividend: ₹20 10
8 7 Return expressed per year
Return = (650−500+20) 6
÷ 500 × 100 4
4
2 Total Return
= 34% ✅
0
Capital gains + dividends
Savings Fixed Equity Direct
Account Deposit Fund Stocks
Types of Returns
03 · Nominal Rate of Return
What is it? Formula
The stated return on an investment before adjusting for
inflation or compounding frequency. It is the 'face value' Nominal Return = (End Value − Begin Value) ÷ Begin Value ×
return. 100
Nominal Return: Investment vs Maturity Value 📌 No Inflation Adjustment
200 Overstates real purchasing power gained
148
150 126
116
100 107 100 100 100
100 🏦 Bank Quoted Rates
FD, loan, savings rates are always nominal
50
0
Bank FD Post Office Corporate Govt Bond 💡 Example
(1 yr) (2 yr) Bond (3 yr) (5 yr) ₹10,000 → ₹11,200 in 1 year = 12% nominal
Investment (₹ '000) Value at Maturity (₹ '000)
04 · Effective Annual Rate (EAR)
EAR reflects the actual annual return after accounting for compounding within the year — always higher than the nominal rate.
💡 Example (12% nominal)
EAR = (1 + r/n)ⁿ − 1
r = nominal rate, n = compounding EAR (Monthly) = (1+0.12/12)¹² − 1
periods/yr = 12.68%
More frequent → higher EAR
EAR vs Compounding Frequency (12% Nominal)
13 13
Nominal Rate 12.00%
12.8 13
13
12.6 12
12.4
12.2
12
12 EAR (Monthly) 12.68%
11.8
Gain from
compounding +0.68%
Takeaway: The more frequently interest compounds,
the higher your actual return!
05a · Internal Rate of Return (IRR)
IRR is the discount rate at which NPV = 0. It is the annualised rate an investment earns over its entire lifetime.
IRR Cash Flow Diagram (IRR ≈ 20.9%) How to Use IRR
60 50
40
40 30
20 NPV = Σ [CFₜ / (1 + IRR)ᵗ] = 0
20
0
-20 ✅ IRR > Cost of Capital → ACCEPT project
-40
-60
❌ IRR < Cost of Capital → REJECT project
-80
-100
-100
-120 🔄 Compare multiple projects → Higher IRR wins
Year 0 Year 1 Year 2 Year 3 Year 4
(Invest)
IRR ≈ 20.9% | If cost of capital = 15%, ACCEPT this investment
05b · Compounded Annual Growth Rate (CAGR)
CAGR is the steady annual rate at which an investment grows from beginning to end value, assuming reinvestment each year.
Start Value End Value (5yr) CAGR
CAGR = (End / Begin)^(1/n) − 1
n = years ₹50,000 ₹1 Lakh 14.87%
CAGR (Smooth) vs Actual Year-on-Year Growth
150000
100000
50000
0
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Actual Investment (₹) CAGR Smooth Growth (₹)
06 · Real Rate of Return
Real Rate of Return = Nominal Return adjusted for Inflation. It shows the true change in purchasing power.
Fisher Equation 💡 Example Nominal Inflation Real Return
Real = (1+Nominal)/(1+Infla on) − 1
≈ Nominal − Infla on
Nominal 10%, Inflation 6%
Real = (1.10/1.06)−1 ≈ 3.77%
10% 6% 3.77%
Nominal vs Inflation vs Real Return by Asset Class
18
20
13
15 11
10 6 7 6
8
6 6 7 6
4
5 1 1
0
-5 -2
Savings Fixed Govt Equity Direct
A/C Deposit Bond Fund Stocks
Nominal Return (%) Inflation (%) Real Return (%)
S U M M A R Y
Key Takeaways
Risk–Return Higher risk demands higher return — know your risk appetite before investing.
Returns Measure via absolute, annualised, or total return depending on time horizon.
Nominal Stated return — does NOT account for inflation or compounding frequency.
EAR True annual return after compounding; always exceeds the nominal rate.
IRR & CAGR IRR evaluates project viability; CAGR smooths multi-year investment growth.
Real Return Inflation-adjusted return = actual wealth and purchasing power created.