Financial Management \ Lecture 2 “ Risk And Return ”



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Lecture 2 Risk And Return - part 1 october 15 (3)
lec 2, profitability and market

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Financial Management

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Lecture 2


“ Risk And Return ”
Portfolio: A collection, or group, of assets . (Diversification )
Risk: A measure of the uncertainty surrounding the return that an investment will earn or, More formally, The variability of returns associated with a given asset.
RISK DEFINED
Risk is a measure of the uncertainty surrounding the return that an investment will earn. Investments whose returns are more uncertain are generally viewed as being riskier.
More formally, the term risk is used interchangeably with uncertainty to refer to the variability of returns associated with a given asset( Actual & Expected Return ) or Dispersion…….?
RETURN DEFINED
  • Obviously, if we are going to assess risk on the basis of variability of return, we need to be certain we know what return is and how to measure it.
  • The total rate of return (HPR ) :total gain or loss experienced on an investment over a given period. Mathematically, an investment’s total return is the sum of any cash distributions (for example, dividends or interest payments) plus the change in the investment’s value, divided by the beginning-of-period value.
  • The expression for calculating the total rate of return earned on any asset over period (t), (r t), is commonly defined as

RETURN DEFINED
  • Obviously, if we are going to assess risk on the basis of variability of return, we need to be certain we know what return is and how to measure it.
  • The total rate of return (HPR ) :total gain or loss experienced on an investment over a given period. Percentage Change on Asset’s Value

=(Holding Period Return(HPR

Defined As : Percentage Change in an investment Value During A specific period of time “ can be one Day or year or even more than That.
  • Ending price : Selling price .
  • Beginning Price : Purchasing Price .initial Value
  • C f : Cash Flow “Dividends” or A regular Payment, which reflect An “Ordinary Income or Profit .


  • There is another type of Profit that we can achieve called Capital Gains” come from increasing the Market price per share” , & located in the first part in pervious Formula ( ending Price – Beginning Price )

keep in mind
Robin wishes to determine the return on two stocks that she owned during 2009, Apple Inc. and Wal-Mart. At the beginning of the year, Apple stock traded for $90.75 per share, and Wal-Mart was valued at $55.33. During the year, Apple paid no dividends, but Wal-Mart shareholders received dividends of $1.09 per share. At the end of the year, Apple stock was worth $210.73 and Wal-Mart sold for $52.84. Substituting into Equation 8.1,
Can calculate the annual rate of return, r, for each stock.
Robin made money on Apple and lost money on Wal-Mart in 2009, but notice that her losses on Wal-Mart would have been greater had it not been for the dividends that she received on her Wal-Mart shares. When calculating the total rate of return, it is important to take into account the effects of both cash disbursements and changes in the price of the investment during the year.
Thank you
Dr /Samira Allam.
Lecture 2
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