Risk Return Trade Off

"No risk, No gain"

1. Presentation on Risk Return Trade Off K.Naga Jyothi MBA I st year 1238-16-672-027

2. Risk ?? A risk is a potential problem – it might happen or it might not. Risk involves uncertainty . It may happen or it may not.. “ The variability of return around the expected average is thus a quantitative description of risk.” -Fischer & Jordan

3. Probability unknown Cannot be measured Outcome is unknown Uncontrollable Probability is known Can be measured Outcome is known Controllable Risk vs Uncertainty

4. Types of Risks

5. Also known as un-diversifiable/volatile risk. A n uncertainty inherent to the entire market or entire market segment. Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Systematic Risk

6. Market risk   :- It is the fluctuation of returns caused by the macro economic factors that affect all risky assets. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters and terrorist attacks. Purchasing power risk:- Also known as inflation risk. It is the chance that the cash flows from an investment won't be worth as much in the future because of changes in purchasing power due to inflation . The purchasing power risk of  holding cash rather than a  physical asset like   gold or  real estate tends to  increase when   inflation is high Interest Risk:- Interest  rate  risk  is the  risk  that arises for bond owners from fluctuating  interest rates. As interest rates rise, bond prices fall, and vice versa. It is the risk taken by bond investors, that interest rates will rise after they buy .

7. Also known as specific risk/ diversifiable risk/ residual risk. It is the type of uncertainty that comes with the company or industry you invest in. Unsystematic Risk

8. Business risk:- The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence etc Strategic risk:- It’s the risk that your company’s strategy becomes less effective and your company struggles to reach its goals as a result. It could be due to technological changes, a powerful new competitor entering the market, shifts in customer demand, spikes in the costs of raw materials, or any number of other large-scale changes . Compliance risk:- Are you complying with all the necessary laws and regulations that apply to your business ? But laws change all the time, and there’s always a risk that you’ll face additional regulations in the future. And as your own business expands, you might find yourself needing to comply with new rules that didn’t apply to you before. Operational Risk:- refers to an unexpected failure in your company’s day-to-day operations.

9. Financial Risk:- the category of financial risk refers specifically to the money flowing in and out of your business, and the possibility of a sudden financial loss Reputational Risk :- One negative blog post or product review can spread online in a flash and change the direction of a company .” Other Risks :- They include risks from the environment, such as natural disasters, employee risk management, political and economic instability in countries you import from or export to.

10. R isks arising from the events taking place within the organization. and arise during the normal operations of the company. These risks come up due to economic events that arise from outside of a company's organization.

11. 2. Financial risk:- Financial risk is any of various types of risk associated with  financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent

12. While some investors will settle for principal protection, most investors are in search of return, specifically alpha returns. It comprises any change in value and interest or dividends or other such cash flows which the investor receives from the investment. A loss instead of a profit is described as a negative return . RETURNS ?? ROI :- It measures  the  gain or loss generated on an investment relative to the amount of money invested. ROA :- tells you what earnings were generated from invested capital (assets ). ROE :- It  is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders'  equity.

13. Also known as Ex-post return, or could have been earned by the investor on the investment made by him. This kind of a return is affected by the risk and uncertainty. This is a return from an asset that an investor anticipates or expects to earn over some future period of time . It is usually based on historical data and is not guaranteed. For the most part, the expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.

14. RISK RETURN TRADE OFF Higher risk is associated with greater probability of higher return, and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment  decisions  is called the risk return trade off . According to the risk-return tradeoff, invested money can render higher profits only if the investor is willing to accept the possibility of losses.

15. Greater the risk, greater the return. Lesser the risk, lesser the return. “ No risk, No gain.”