Uncertainty associated with return
Investors wanta return either:
D
I Actual return expected return
continuous (dividends, interest)
Actual return (Expected return
Endof
period (capital growth)
Each investor must
decide on an
DETERMINING RETURN:
objective
investment
If there is
uncertainty f uture
about
satisfactory level of return
(amtof Income;apply probabilities to
specific risk profile risk
to acceptt o achieve desired return) calculate an expected future return.
willing
z
EXAMPLE:
↳
↳ fixed
PORTFOLIO: Investi n depositw ith variable
int rates
Desiredportfolio:diversified
4 possible intrates:9;10%; 11%.
Negative performance in one
RETURN AND RISK 12.1
investmentcancelled out
by positive
ofrealisation:0.10,0.30
probability
I
performance in another Investment.
portfolio
0.40, 0.20
management philosophy: I
Am expected retur n:(9%) (0.10) t
compile combination of Investment
(10.1.0.3) (ICO)
realistic HI.CO.C
+
alternatives to achieve a
acceptable level ofr is k within the
investmentobjectives. CHARACTERISTICS OF
ASSET
CLASSES:
I Risks Increase as the return of
the
Be
MEASURES TO DETERMINE
RISK: Alter various c lasses
asset increase.
1. calculate the variance/standard deviation ofexpected returns ·Risk bills
attached to
treasury
The greater the variance STDEU, the greater the
uncertainty (money market of
i nstrument
thatthe expected return will be realised, thus the greater the risk
goul is
very low accompanying
B
problem:based on historical data. return is also low.
2. Determine ofretur ns with a higher risk,
the
range ·property, much
Larger range:greater uncertainty of expected
what return will have a much higher expected
will be ... the greater the risk return.
3. View
only the returns lower than the expected return
(than portfolio management:combination
:Implies the calculation s emi-variance.
of ofa
healthy balance ofi nvestment
Instruments thatsuite the investor's specific
profile r isk/return.
of
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