Returns & Return on a Single Security.pptx

Return is the gain or loss an investor earns from an investment over a period.

1. Returns

2. Introduction Return is the gain or loss an investor earns from an investment over a period. It includes income (like dividends or interest) and capital gain/loss (from change in price).

3. Return on a Single Security Formula: Return(R)=Income+(End Price−Beginning  Price)Beginning price   x100 🔹 Example: Bought a share at ₹100 Received dividend ₹5 Sold at ₹120 R=5+(120− 100)100×100= Rs 25

4. Types of Returns Type Description Actual Return Return realized on an investment Expected Return Return investor anticipates in future Holding Period Return (HPR) Return over the entire holding period, regardless of time Annualized Return Standardized return per year

5. Expected Return on a Security When returns are uncertain, the Expected Return (ER) is calculated based on probability: 🔹 Formula: E(R)=∑( Pi×Ri ) Pi ​ = Probability of return scenario Ri ​ = Return in that scenario Example

6. EXample E(R )=(0.3×25)+(0.5×15)+(0.2×−5)=7.5+7.5−1=14% Scenario Probability (P) Return (R) Boom 0.3 25% Normal 0.5 15% Recession 0.2 -5%

7. Return on Portfolio A portfolio is a combination of two or more investments. Portfolio return is the weighted average of returns of individual securities . Formula: Rp​= ∑ (wi​×Ri​ ) Where: wi ​ = Proportion of investment in security iii Ri ​ = Return of security iii Rp ​ = Return of portfolio

8. EXAMPLE Security Investment Weight (w) Return (R) A ₹50,000 0.5 10% B ₹30,000 0.3 15% C ₹20,000 0.2 5% Rp ​=(0.5×10)+(0.3×15)+(0.2×5)=5+4.5+1=10.5%

9. Importance of Calculating Returns 📊 Performance Evaluation : Measure how well an investment or portfolio performed. 📈 Risk Assessment : Helps compare with risk to determine risk-adjusted return. 🎯 Portfolio Strategy : Assists in rebalancing and selecting assets. 💹 Investor Decision Making : Helps investors choose between alternatives.

10. Factors Affecting Returns Market trends Interest rates Company performance Inflation Government policies Global events

11. Types of Returns 1 . Actual Return (Realized Return) Meaning : The return that is actually earned from an investment in the past. Includes : Dividend/interest + capital gain/loss. Use : Measures historical performance. Example : If you bought a stock for ₹100 and sold it at ₹120 and earned ₹5 as a dividend, actual return = ₹25 or 25%.

12. 2. Expected Return Meaning : The anticipated return on an investment based on probabilities of different outcomes. Formula : E(R)=∑( Pi×Ri ) Where : Pi ​ = Probability of outcome Ri ​ = Return in that outcome Use : Helps in forecasting and comparing investment options.

13. 3. Holding Period Return (HPR ) Meaning : Return earned over the entire holding period of an investment, regardless of the duration. Formula : HPR=Income+( EndingPrice− BeginningPrice )BeginningPrice×100 Use : Useful for investments held less or more than one year.

14. 4. Annualized Return Meaning : Converts returns of any holding period into an annual rate of return. Formula : Annualized Return=(1+HPR)1n− 1 Use : For comparing investments with different time horizons

15. 5. Nominal Return Meaning : The return not adjusted for inflation. Use : Shows the actual gain in money terms. Example : If you earn 8% on a bond, that’s the nominal return.

16. 6. Real Return Meaning : Return adjusted for inflation. Formula : Real Return=Nominal Return−Inflation  Rate Use : Indicates the actual increase in purchasing power.

17. 7.Risk-Adjusted Return Meaning : Return earned per unit of risk taken. Popular Measures : Sharpe Ratio Treynor Ratio Use : Helps compare investments with different levels of risk.

18. 8.Total Return Meaning : The overall return including income (dividends/interest) and capital gains. Formula : Total Return= Income+Capital   Gain/Initial   Investment×100

19. Real Return vs. Nominal Return Type Formula & Meaning Nominal Return Return before adjusting for inflation Real Return Real Return=Nominal Return−Inflation  Rate

20. Type Key Feature Use Case Actual Return Earned in the past Performance evaluation Expected Return Based on probabilities Investment decision-making Holding Period Return Total return over investment period Short or long-term investment Annualized Return Standardized yearly return Comparison across time periods Nominal Return Before inflation Gross return tracking Real Return After adjusting inflation Purchasing power assessment Risk-Adjusted Return Return per unit of risk Portfolio comparison Total Return Income + Capital Gain Overall investment yield Relative Return Return vs benchmark Performance of fund/investor