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Summary

Summary Risk, Return and Portfolio Management

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Summary of 4 pages for the course Corporate Financial Management at UCT (Complete summary)

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  • August 17, 2016
  • 4
  • 2016/2017
  • Summary

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By: maryamgopal • 3 year ago

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MODULE 5: RISK, RETURN & PORTFOLIO MANAGEMENT


Risk and return
 The greater the risk, the larger return required by investors for compensation for
bearing that risk. Higher risk also means less certainty or greater volatility
 Return is the benefit an investor receives/earns from an investment

Total Holding Period Return
 Return on shareholder investment, is made up of two components
1. Capital gains/losses – arising from price changes
2. Investment income/dividend yield – dividend or interest received

[ ( 𝑃1 − 𝑃0 ) + 𝐷 ] × 100
=
𝑃0

Risk and return measures, using historical data
Year Actual Returns Average return Deviations from mean Deviation squared
𝑅 𝑅̅ 𝑅 − 𝑅̅ (𝑅 − 𝑅̅)2

Mean = Total Annual Returns ÷ no. of years
Variance = Total Deviations Squared ÷ (no. of years -1)
Standard deviation = [Variance]0.5

Risk and return measures, using forecast data
Economic Probability Actual Expected Deviation Deviation
state return return squared
𝑝 𝑅 𝑝 × 𝑅 𝑅 − 𝐸[𝑅] 𝐷𝐸𝑉 2 𝑝 × 𝐷𝐸𝑉 2

Expected Return = Sum of p x R
Variance = Sum of p x DEV2
Standard deviation = [p x DEV2]0.5

Interpretation
Normal distribution
 symmetric frequency distribution that is completely described by its mean or
expected return and standard deviation
 its left and right sides are mirror images of each other and:
 the mean falls directly at the centre of the distribution
 the probability that an outcome is a particular distance from the mean is the
same whether the outcome is on the left or right side of the distribution
 the standard deviation tells us the probability that an outcome will fall within a
particular range or a particular distance from the mean

No. of standard Confidence level Formula for calculating the interval
deviations from mean (min & max)
1.000 68.26% E[RA] +/- (𝜎 × 1.000)
1.645 90% E[RA] +/- (𝜎 × 1.645)
1.960 95% E[RA] +/- (𝜎 × 1.960)
2.575 99% E[RA] +/- (𝜎 × 2.575)

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