risk mgt .neeraj

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Investment Risk Management



Investment

Investment is the employment of money or capital in

order to gain profitable returns, as interest, income, orappreciation in value, over a given point of time.



Characteristics of Investment1. It is not saving

2. Employment of capital takes place

3. Risk related constraints exist4. Time horizon depend on risk-return profile

5. Capital appreciation may or may not happen



Importance of Investment1. Financial Independence

2. Increase wealth

3. Fulfilling personal & family goals4. To beat inflation

5. Preparation for adverse condition

6. For the growth of country



Investment alternatives1. Non-Marketable Financial Assets

2. Equity Shares

3. Bonds4. Money Market Instruments

5. Commodities

6. Mutual Fund

7. Life Insurance Policies

8. Real Estate

9. Precious Objects

10. Financial Derivatives



Criteria for evaluation of

investmenty Rate of Return

y Risk

y Marketability : liquid, low cost, less volatiley Tax Shelter

y Convenience



Return

It is the reward for the employing capital or asset over

a given point of time.

0r

Reward for the investment



Components of Return1. Current Return

2. Capital Return

Total Return = Current return + Capital Return

Note: Current Return may be +ve or zero, whereascapital return ve, zero or +ve.



Rate of return = Annual Income + (ending price Beginning price) / Beginning Price

R = C + (Pe Pb) / Pb

Eg.Price at beg. Rs. 60

Dividend paid towards the end of the year Rs. 2.40

Price at the end of the year Rs. 66

What is Total return, current return & Capital Return?



RiskRisk refers to the possibility that actual outcome of an

investment will differ from its expected outcome.

Sources of Risk

1. Business risk

2. Interest risk

3. Market Risk



Types of RiskBroadly we can it divide on the basis its nature

1. Systematic riskEg. Market Risk, Interest risk, Inflation etc

2. Unsystematic risk

Eg. Financial Risk , Business Risk



Risk-Return relationship



y The relationship between risk and return is a fundamentalfinancial relationship that affects expected rates of returnon every existing asset investment. The Risk-Returnrelationship is characterized as being a "positive" or "direct"

relationship meaning that if there are expectations of higher levels of risk associated with a particular investmentthen greater returns are required as compensation for thathigher expected risk. Alternatively, if an investment hasrelatively lower levels of expected risk then investors aresatisfied with relatively lower returns.



-This risk-return relationship holds for individual investors and

business managers. Greater degrees of risk must be compensated

for with greater returns on investment. Since investment returnsreflects the degree of risk involved with the investment, investors

need to be able to determine how much of a return is appropriate

for a given level of risk. This process is referred to as "pricing the

risk". In order to price the risk, we must first be able to measure

the risk (or quantify the risk) and then we must be able to decide

an appropriate price for the risk we are being asked to bear.

-This module provides the student with an understanding of

various forms of risk that allow the incorporation of risk

adjustments into financial management decision making and theasset pricing processes. In the introductory discussions, different

types of risk are defined and explored. At more advanced levels,

various definitions of risk are quantified and with the help of

financial theory, appropriate risk adjusted returns are

risk mgt .neeraj

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