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Mesuring Expected Returns, Discussing Risk

The document introduces concepts related to investments including expected returns, risks, and beta risk. It explains how to calculate expected returns using probabilities and possible returns. It also discusses different types of risks like business risk, financial risk, and systematic and unsystematic risks. Beta risk is explained as a statistical measure of systematic risk.

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Isse Nvrro
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39 views4 pages

Mesuring Expected Returns, Discussing Risk

The document introduces concepts related to investments including expected returns, risks, and beta risk. It explains how to calculate expected returns using probabilities and possible returns. It also discusses different types of risks like business risk, financial risk, and systematic and unsystematic risks. Beta risk is explained as a statistical measure of systematic risk.

Uploaded by

Isse Nvrro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to Investments

EXPECTED RETURNS = sum of (probabilities & possible returns) Prof S G Badrinath


Measuring Expected Returns, Discussing Risk

Prob. Possible Return (over next year)

0.5 50%

0.3 10%

0.2 -20%

Exp. Return = 0.5 * 50% + 0.3 * 10% + 0.2 * -20% = 24%

Standard deviation = 28%, link to Normal Distribution


Introduction to Investments
Risks Prof S G Badrinath
Measuring Expected Returns, Discussing Risk

• Business Risk
• Financial Risk
• Exchange rate/Country risks
• Systematic and unsystematic risks
• Beta Risk

 Systematic risk – risk inherent to the entire market.


– also known as “undiversifiable risk”,
“volatility” or “market risk.”

 Unsystematic risk – risk specific to a particular stock or industry.


Introduction to Investments
Beta Risk Prof S G Badrinath
Measuring Expected Returns, Discussing Risk

 Statistical measure of systematic risk of an enterprise.

 Systematic risk is the only risk that matters – since unsystematic risk cancels out when
you diversify your portfolio.

 Beta risk is not diversifiable.


© All Rights Reserved.
This document has been authored by Prof S G Badrinath and is permitted for use only within the course “Introduction to
Investments" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means –
electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.

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