CHAPTER 6: RISK AND RETURN
Rational Investors require the highest possible return with the lowest possible risk.
I
positive relationship between risk and return.
Return M
required a N
M
RF R
S
RISK) exposure
RETURN:
Expected benefits that will be earned from an Investment
1
To determine what the return IS:
Determine the profit (meaningless)
&
Calculate the rate of return
EXAMPLE:
Share
·
A's MD= R2
xpected
& value after year: R4
ProfIt=R2
·
Share B's MP: R30
Expected value after year: R4C
profIt= RI0
4 -
I
1 00
* 1001
=
·
Rate of return: A I
4 0-3C
B= 3O
1 00
x =
33.33
, I
SINGLE CHOLDING) PERIOD RETURN:
keep Investment for a cer tain period (a year)
Two forms of return for stock Investment:
1 pludend Income
2.
Capital profit/loss
intentwwe erewrotetterit
capital profit/loss + dividend 100 po =
purchase price
is P1: sales price
D1: total dividends received
EXAMPLE:
Share sold @RS (P0)
Sold /
year later 9R7(p.)
Interim dividend= R0.29 3 final dividend= D0.02S(D1)
Return =
(R7-RS) 50050 x 100
RS
SO I
=
ADVANTAGES OF SINGLE PERIOD RETURN: DISADVANTAGES OF SINGLE PERIOD RETURN:
5 imple to calculate Does not take time value of money into
simplifies comparison Consideration
ADVANTAGES OF USING INTERNAL RATE OF RETURN (IRR)
Take time value of money into consideration
Makes provision for more than one period.
Rational Investors require the highest possible return with the lowest possible risk.
I
positive relationship between risk and return.
Return M
required a N
M
RF R
S
RISK) exposure
RETURN:
Expected benefits that will be earned from an Investment
1
To determine what the return IS:
Determine the profit (meaningless)
&
Calculate the rate of return
EXAMPLE:
Share
·
A's MD= R2
xpected
& value after year: R4
ProfIt=R2
·
Share B's MP: R30
Expected value after year: R4C
profIt= RI0
4 -
I
1 00
* 1001
=
·
Rate of return: A I
4 0-3C
B= 3O
1 00
x =
33.33
, I
SINGLE CHOLDING) PERIOD RETURN:
keep Investment for a cer tain period (a year)
Two forms of return for stock Investment:
1 pludend Income
2.
Capital profit/loss
intentwwe erewrotetterit
capital profit/loss + dividend 100 po =
purchase price
is P1: sales price
D1: total dividends received
EXAMPLE:
Share sold @RS (P0)
Sold /
year later 9R7(p.)
Interim dividend= R0.29 3 final dividend= D0.02S(D1)
Return =
(R7-RS) 50050 x 100
RS
SO I
=
ADVANTAGES OF SINGLE PERIOD RETURN: DISADVANTAGES OF SINGLE PERIOD RETURN:
5 imple to calculate Does not take time value of money into
simplifies comparison Consideration
ADVANTAGES OF USING INTERNAL RATE OF RETURN (IRR)
Take time value of money into consideration
Makes provision for more than one period.
