1. Risk Analysis in Capital
Budgeting
By: Vikram.G.B
Lecturer, P.G dept. of Commerce
V.D.C, Bangalore-55

2. Risk & uncertainty:-
• Uncertainty is a situation where a decision can
lead to more than one possible outcome.
• Risk exists because of the inability of the
decision maker to make perfect forecast.
• Traditional difference between Risk &
Uncertainty is
▫ uncertainty can't be quantified whilst risk can.

3. • Risk is concerned with the use of quantification
of the likelihood of future outcomes.
• Uncertainty is to cover all future outcomes
which cannot be predicted with accuracy.

4. Why Risk Arises in Investment Evaluation?
• Because unable to anticipate occurrence of the
possible future events with certainty and
consequently.
• Unable to make correct prediction about the
cash flow sequence.

5. Categories of Risk:-
Risk
Unsystematic
Risk
Business
Risk
Internal
External
Financial
Risk
Systematic
Risk
Market Risk Interest Risk Inflation
Risk

6. Systematic Risk:-
• It relates to economic trend whichs affect the
whole market.
• It is a that portion of variation in return caused
by the factors that affect the prices of all
securities and it can’t be avoided.
• The effect in a systematic return causes the
prices of all individual shares/bonds to move in
the same direction.

7. Reasons for occurring of Systematic Risk
• Market Risk: Variations in price sparked off due to
real social, political and economic events.
• Interest Rate Risk: Uncertainty of future market
values and the size of future incomes, caused by
fluctuations in the general level of interest.
• Inflation Risk: It is referred to uncertainties of
purchasing power due to inflation.

8. Unsystematic Risk:-
• It is that portion of risk which is caused due to
factors unique or related to a firm or industry.
• This type of risk can be eliminated by
diversification of portfolio.

9. Reasons for occurring of unsystematic Risk
• External Business Risk: It arises due to change
in operating conditions caused by conditions
thrust upon the firm which beyond its control.
• Internal Business Risk: It is associated with the
efficiency with which a firm conducts its
operations within the broader environment
imposed upon it.

10. • Financial Risk: It is associated with the capital
structure of a firm.
 The extent of financial risk depends on the leverage
of the firm’s capital structure.

11. Investors’ Attitude to Risk:-
• Common investors will have 3 possible attitudes to
undertake risky course of action
▫ An aversion to risk.
▫ A desire to take risk.
▫ An indifference to risk.