Return and Risk from Investing

Return and Risk from Investing

Return

•      Yield – Interest and Dividend

•      Capital Gain

•      Total Return in absolute form = Yield + Capital Gain

•      Rate of Return or Total Return Ratio = (Cash Payment+ Capital

Gain)/Purchasing Price

Return Relative = (Cash Payment + Selling

Price)/ Purchasing Price

Cumulative Wealth Index = Initial

Wealth(1+TR1)(1+TR2)……..(1+TRN)

TR when added with 1, it becomes return relative

Return

•      Total Return in domestic term=

[RR * (Ending value of foreign currency/Beginning value of foreign currency)] – 1

•      Arithmetic Mean Return – average return of a single period

•      Geometric Return-average return of multiple periods

G = [(1+TR1)……(1=TRn)]1/n – 1

(1+G)2 = (1+ AM)2 – (std. dev)2 approximately

•      Inflation adjusted return =

[(1+TR)/(1+Inflation)] – 1

Risk

•      Interest rate risk

•      Inflation risk

•      Exchange rate risk

•      Market risk

•      Financial or Leverage risk

•      Country Risk

•      Business Risk

Risk

Two types of risk –

•      Systematic Risk (beta) vs. Unsystematic risk (std. dev.)

•      Calculation of beta and std. dev.

•      Risk Premium

•      Equity Risk Premium – difference in between stock return and risk free rate

ERP = [(1+ TR)/ (1+Risk Free)] – 1

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