Risk-Return relationship
By now you should understand that even with the
By now you should understand that even with the most conservative investments you facemost conservative investments you face some element of risk. However, not
some element of risk. However, not investing your money is also riskinvesting your money is also risk yy. For . For example, puttingexample, putting your money under the mattress invites the
your money under the mattress invites the risk of theft and the risk of theft and the loss in purchasing power ifloss in purchasing power if prices of goods and
prices of goods and services rise in the economy. When you recognize the different levels services rise in the economy. When you recognize the different levels ofof risk for each type of investment
risk for each type of investment asset, you can better manage the total asset, you can better manage the total risk in your investmentrisk in your investment portfolio.
portfolio.
A direct correlation exists b
A direct correlation exists between risk and return and is illustrated etween risk and return and is illustrated in Figure. The greater thein Figure. The greater the risk, the greater is t
risk, the greater is t he potential return. However, investing in securities with the potential return. However, investing in securities with t he greatesthe greatest return and, therefore, the greatest risk can lead
return and, therefore, the greatest risk can lead to financial ruin if everything does not to financial ruin if everything does not gogo according to plan.
according to plan.
Risk and Return Risk and Return
Understanding the risks pertaining to
Understanding the risks pertaining to the different investments is of little consequence unlessthe different investments is of little consequence unless you’re aware of your attitude toward risk. Ho
you’re aware of your attitude toward risk. How much risk you can tolerate dw much risk you can tolerate depends on manyepends on many factors, such as the t
factors, such as the t yype of pe of person you are, your investment objectives, the dollar amount operson you are, your investment objectives, the dollar amount o ff your total assets, the s
your total assets, the size of your portfolio, and the tize of your portfolio, and the t ime horizon for your investments.ime horizon for your investments.
How nervous are
How nervous are yyou about ou about your invyour investments? Will estments? Will you check the prices of you check the prices of yyour stocksour stocks daily? Can you sleep at
daily? Can you sleep at night if your stocks decline in price bnight if your stocks decline in price b elow their acquisition prices?elow their acquisition prices?
Will you call your broker every time a stock falls by a point or two? If so,
Will you call your broker every time a stock falls by a point or two? If so, yyou do not tolerateou do not tolerate risk well, and
risk well, and your portfolio should be geared toward conservative investments that generateyour portfolio should be geared toward conservative investments that generate income through capital preservation. The percentage of your portfolio allocated to
income through capital preservation. The percentage of your portfolio allocated to stocks maystocks may be low to
be low to zero depending on yzero depending on your coour comfort zone. If you are not bothered when your stocksmfort zone. If you are not bothered when your stocks decline in price because
decline in price because with a long holding period you can wait ouwith a long holding period you can wait out the decline, yourt the decline, your portfolio of investments can be designed
portfolio of investments can be designed with a higher percentage of stocks. Figure 2with a higher percentage of stocks. Figure 2 illustrates the continuum of risk to
illustrates the continuum of risk to lerance.lerance.
A wide range of re
A wide range of returns is associated with each tturns is associated with each t yype pe of security. For example, the many typesof security. For example, the many types of common stocks, such as
of common stocks, such as blue-chip stocks, growth stocks, income stocks, and spblue-chip stocks, growth stocks, income stocks, and sp eculativeeculative stocks, react differently. Income stocks generally are
stocks, react differently. Income stocks generally are lower risk and offer returns mainly inlower risk and offer returns mainly in the form of dividends, whereas growth stocks are
the form of dividends, whereas growth stocks are riskier and usually offer higher returns inriskier and usually offer higher returns in the form of capital gains.
the form of capital gains. Similarly, a broad range of risks and Similarly, a broad range of risks and returns can be found for thereturns can be found for the different types of bonds. You
different types of bonds. You should be aware of this broad range of risks and should be aware of this broad range of risks and returns for thereturns for the different types of securities so
different types of securities so that you can find an acceptable level of that you can find an acceptable level of risk for risk for yyourself.ourself.
Figure 2: Continuum of Risk Tolerance Figure 2: Continuum of Risk Tolerance
53 53
CHAPTER: 4 CHAPTER: 4
INTERPRETATION INTERPRETATION
AND AND
ANALYSIS
ANALYSIS
HDFC:
Share price in the openingShare price in the opening
Year
Total return return 143.68143.68
Average return
Average return =143.68/5 =143.68/5
=28.74
=28.74
Interpretation:
Interpretation: The average returns of HDFC are The average returns of HDFC are 28.74 wherein the maximum returns are in28.74 wherein the maximum returns are in
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Interpretation: The average returns of ICICI are 20.77 wherein the maximum returns are in The average returns of ICICI are 20.77 wherein the maximum returns are in the third year i.e. 2009-10.
the third year i.e. 2009-10.
Investment in HDFC is more profitable to the investor as the average returns are Investment in HDFC is more profitable to the investor as the average returns are comparatively more than the average returns of ICICI. Thus, a
comparatively more than the average returns of ICICI. Thus, a n investor who is onlyn investor who is only concerned about the returns in long run
concerned about the returns in long run should invest in HDFC securities.should invest in HDFC securities.
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