1.
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Risk and
Rate of
Return

2.
CONTENTS OF THIS
REPORT
● FUNDAMENTALS OF RISK AND RETURN
● MEASUREMENT OF RISK AND RETURN
● RISK MEASUREMENT MODEL
● RISK OF A SINGLE ASSET
● RISK OF PORTFOLIO ASSET
● INVESTMENT MODELS: CAPITAL ASSET PRICING MODEL (CAPM)

3.
01 Define and explain the
concept ,nature,
purpose, and
classification of risk and
return
02
Solve and compute for
the risk and returns of an
asset using portfolio
return, standard
deviation, correlation and
diversification.
03
Understand the risk
assessment and
measurement of a single
asset
04 Compute and solve the
required rate of return
using the Capital Asset
Pricing Model (CAPM)
LEARNING
OBJECTIVES
vv
05 Apply the concept of risk and
return on making investment
decisions on single and
portfolio of assets

4.
01. Fundamentals
of Risk and Return

5.
In most important business decisions there are two key
financial considerations: risk and return
INTRODUCTION

6.
“Higher returns
entail higher
risks”

7.
WHAT IS RISK ?
variability of returns associated with a
given asset

8.
Treasury Bonds
Low Risk
Guaranteed by the
government

9.
Stocks
High Risk
Many Factors

10.
Return Defined
Return represents the total gain or loss on an investment
The most basic way to calculate return is as follows:

11.
Illustration
The investment manager of Rico Group of Companies is evaluating the rates of
return of two investments, Investment A and Investment B. Both investments
were acquired during 2019 at the price of Php100,000 and Php150,000 for A and
B respectively. During 2020, the investments generated cash inflows of
Php25,000 and Php47,500. By the end of 2020 the valuation of investment A is
Php115,000 and that of investment B is Php170,000. What are the rates of
return for these two investments?

12.
r =
25,000+(115,000−100,000)
100,000
= 40%
Investment A
t
t
Investment B
r =
47,500+ 170,000−150,000
150,000
= 45%

13.
Investor who prefer less risky
over more risky investments
Chooses investment based
solely on their expected
returns disregarding the risk
Risk Averse Risk Nuetral
Investors who prefer
investment with higher risk
and may sacrifice some
expected return
Risk Seeking
Risk Preferences

14.
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