Return and risk

1. Advanced Financial
Risk Management
TOPIC: RETURNS
Presented by: Aneha

2. CONTENT
 What is Return?
 What are main Components of
Return?
 What are the types of Return?
 How to Calculate Them?

3. What is Return?
“The total gain or loss experienced on an investment over a given period of
time is called return.”

4. Components of Return
1.Yield/Current Return
2.Capital Gain/ Capital Return

5. Components of Return
 Yield/Current Return
The most common form of return
for investors is the periodic cash
flows (income) on the investment,
either interest from bonds or
dividends from stocks.
 Capital Gain/Capital Return
The appreciation (or depreciation)
in the price of the asset, commonly
called the capital gain (Loss).

6. What are the types of Return?
 Realized Return
 Expected/Historical Return
 Nominal Return
 Real Return

7. Realized Return
The actual return earned during the holding period for an
investment e.g. dividend, interest payments.
Applied on stocks

8. Expected Return/Historical Return
Amount of profit or loss an investment can anticipate.
Expected return cannot be Guaranteed.
 The investor cannot be sure of the amount of return he/she is
going to receive.

9. Nominal Return
 The money made without factoring expenses, e.g. taxes, inflation.

10. Real Return
 The money received after factoring the expenses.

11. How to Calculate the return
R= Vf – Vi R = Ci + Pi – Pi-1
_______ ____________
Vi , Pi-1
Vf = Final Value Ci = Cash Flow
Vi = Initial Value Pi = Ending Value
Pi-1 = Beginning Value
History based/Traditional Method , Modern Method

12. Example
Suppose you have initial investment Rs. 100000 and final
value Rs. 200000. then find return?
= Rs.200000 – 100000 /
100000
= 100%

13. Example: Q1
Years Beginning
Value
Ending Value Dividend paid
1 $ 35.0 $ 36.5 $ 3.5
2 36.5 34.5 3.5
3 34.5 35.0 4.00

14. Solution
R = Ci + Pi – Pi – 1 / Pi – 1
Year 1: 3.5 + 36.5 - 35.0 / 35.0 = 14.3%
Year 2: 3.5 + 34.5 – 36.5 / 36.5 = 4.1 %
Year 3: 4.00 + 35.0 _ 34.5 / 34.5 = 13%

15. Example: Q2
Outcomes of
Asset A
P R ER?
1 0.25 13% 3.25%
2 0.50 15% 7.50%
3 0.25 17% 4.25%

16. Solution
Expected Return
Ṝ = ri x Pr
If Probability are same:
Ṝ = ri / n
Ṝ = 45% / 3 = 15%

17. THANK YOU!