Chapter 2
RISK & RETURNS
Lecturer: Doan Thi Cam Van
CONTENT
1. Measuring Risk and Return for a single asset
1. Rate of return achieved
2. Expected returns
3. Measure of Risk
2. Measuring Portfolio Return and Risk
Measuring Returns & Risk for a single asset
What is the capital gains
• Is the increase in a capital asset’s value .
• Is calculated by subtracting the original
purchase price from the sale price
• Realized when the asset is sold
• Required returns
– There are three components make up the required
return from an investment:
• The real rate of return: is the return investors require
for allowing others to use their money for a given
time period
• The anticipated inflation factor
• The risk premium: is the investment return an asset is
expected to yield in excess of the risk-free rate of
return. It will be different for each investment.
+ Real Rate 2%
+ Anticipated inflation 3%
= Risk-free rate 5%
+ Risk premium 6%
= Required rate of return 11%
• Internal Rate of Return (IRR)
– Is a discount rate that makes the net present
value (NPV) of all cash flows equal to zero in a
discounted cash flow analysis.
C1 C2 Cn Pn
NPV = + + … + +
(1+IRR)1 (1+IRR)2 (1+IRR)n (1+IRR)n
– Ci: Net cash inflow during the period t
– Pn: the price of asset at the end of the
investment period (n)
Measure of Return Dispersion
• The range:
– The difference between the highest and lowest
outcomes.
– Very poor descriptive statistic because it becomes
larger as sample size increase.
• The semi-interquartile range:
– The difference between the observation of the 75th
percentile and 25th percentile divided
- doesn’t increase with sample size and is therefore
much more reliable
Ex:
• Given the following hypothetical end-of-period
prices for shares of the Drill-On Corporation,
Probability 0.15 0.10 0.30 0.20 0.25
End-of-period 35.00 42.00 50.00 55.00 60.00
price per share
• And assuming a current price of $50 per share
=> Calculate the rate of for each probability. What
is the expected return? The variance of end-of
period returns? The range? The semi-interquartile
range?
Ex:
Stock A Stock B
Expected return 45% 20%
Standard Variation 15% 10%
Giving your decision to choose better stock
Measure Portfolio Return & Risk
Measure Portfolio Return & Risk
• Investor intends to invest VND 100 million in a
portfolio consisting A & B stock
• Investor’s plan and expected return of each stock
are shown in the following table
Stock Investment Expected
Percentage (%) Returns
A 60 17.5
B 40 5.5
– Calculate expected portfolio return
– Calculate variance & correlation coefficient portfolio
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