Summary Chapter 6 Notes: Risk & Return

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.