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Investment Basics:
Understanding Risk and Return
10-1
Introduction
Risk is a fundamental component of investing.
Risk must be understood and managed.
In selecting securities, it is important to understand
and measure market risk.
Then securities can be selected by choosing securities
with expected returns that exceed required returns.
10-3
Chapter Objectives
To grasp the nature of risk and its sources and to relate risk to
investment return
10-4
Topic Outline
Risk
Return
Applying a Risk-Return Model (Capital Asset Pricing
Model - CAPM)
10-5
Risk and Return
What is Risk?
Sources of Risk
How Much Return Do You Need? (CAPM)
The Iron Law of Risk and Return
To earn higher returns, you must take greater risks.
There is a strong positive correlation between higher
investment return and greater risk.
10-6
What Is Risk?
Investment risk is defined as the more variable an
investments return, the greater its risk.
10-8
Changing Economic Conditions
10-9
Changing Conditions of the Issuer
10-11
Total Risk
Investors invest for the future for the returns they expect to
earn but when the investing period is over, they are left
with their realised returns
Return
10-31
Tutorial 4 :Understanding risk return
1)What is risk?
9) Given that the beta is 0.75, the risk free return is 4% and
the return of the market is 7%, what is the required rate
of return?