Risk & Return I
,Learning Objectives
At the end of this session you should be able to:
• Explain what is meant by the risk-return trade-off
• Calculate the expected return and risk of a single investment
and portfolio
• Explain what is meant by a portfolio
• Understand the concept of diversification
• Understand the concept of correlation
,The Risk – Return Trade off
▪ TANSTAAFL
▪ To make money you need to take risks
• The more risks you take the more you expect to win if you
are right
▪ So investors generally have a choice
• Take low risks and expect low returns
• Take high risks and expect high returns
, Payoffs and Returns
▪ Don’t confuse payoffs and returns
▪ Example: You buy a rare coin today for £20 and expect
to sell it in twelve months time for £30
▪ Your expected payoff in one year is:
• £30 = cash flow you get from selling coin
▪ Your expected return in one year is:
• 50% = the gain made / initial cost
,Learning Objectives
At the end of this session you should be able to:
• Explain what is meant by the risk-return trade-off
• Calculate the expected return and risk of a single investment
and portfolio
• Explain what is meant by a portfolio
• Understand the concept of diversification
• Understand the concept of correlation
,The Risk – Return Trade off
▪ TANSTAAFL
▪ To make money you need to take risks
• The more risks you take the more you expect to win if you
are right
▪ So investors generally have a choice
• Take low risks and expect low returns
• Take high risks and expect high returns
, Payoffs and Returns
▪ Don’t confuse payoffs and returns
▪ Example: You buy a rare coin today for £20 and expect
to sell it in twelve months time for £30
▪ Your expected payoff in one year is:
• £30 = cash flow you get from selling coin
▪ Your expected return in one year is:
• 50% = the gain made / initial cost
