Risk and Return -risk and uncertainty -differences and similarities between risk and uncertainty -types of risk (systematic and unsystematic) -why manages risk? and its scope in finance. -CAPM and its problem -return

2. By: Rida Mazhar

3. Based on current lack of certainty in a
potential fact, event, outcome etc.
Defined by
distributions.
probabilities
or
probabilities
Include both upside and downside potential.
Depend on “who knows what”

4. RISK
1. On the basis of past
relevant experience ,
assign probabilities to
outcomes.
2. Risk increases the
variability of returns
increases.
UNCERTAINTY
1. On the basis of little
past experience, thus
difficult to assign
probabilities to outcomes.
2. Uncertainty increases as
project life increases.

5. RISK
It exists when the
decision maker knows
the various outcomes
but also the probability
associated with each
UNCERTAINTY
potential outcome.
It exists when a decision
maker knows all
potential future
outcomes of a certain
act but for one reason
or another cannot
assign probabilities to
the various outcomes.

6. RISK AND UNCERTAINTY IN FINANCE
The uncertainty associated with returns that
reduces risk into an investment.
Risk is a quantifiable uncertainty.
Risk may be due to environmental or managerial
factors.
From
conception
or
identification
to
implementation, risks issue arise and do affect the
projects in a number of ways.

7. Save resources: People, income, property, assets,
time.
Protects public image.
Protects people from harm.
Prevents/reduce the legal ability.
Protects the environment.

8. Discrete
Complex
Continuous

9. Risk and uncertainty are based on lack of
uncertainty in a potential in a potential fact, event, or
outcome.
Uncertainty is measured relative to expected value.
Risk is measured relative to a set target with
potential consequences that matter.
They can be measured in many ways, but the best
measures are based on probability-weighted average
deviation in value, corresponding to areas under a
CDF curve.

11. By: Muhammad Haris Shakeel

12. 
The risk inherent to the entire market or entire market
segment.

Also known as "un-diversifiable risk" or "market risk."

Interest rates, recession and wars all represent sources
of systematic risk because they affect the entire market

Cannot be avoided through diversification

This type of risk affects a broad range of securities

Systematic risk can be mitigated only by being hedged.

14. Interest-rate risk arises due to variability in the
interest rates from time to time. It particularly
affects debt securities as they carry the fixed
rate of interest

15. Price risk arises due to the possibility that the price of the
shares, commodity, investment, etc. may decline or fall in
the future.
Re-investment rate risk results from fact that the interest or
dividend earned from an investment can't be reinvested
with the same rate of return as it was acquiring earlier.

16. Market risk is associated with consistent
fluctuations seen in the trading price of any
particular shares or securities. That is, it arises due
to rise or fall in the trading price of listed shares or
securities in the stock market.

17. Absolute risk is without any content.
Relative risk is the assessment or evaluation of risk at
different levels of business functions.
Directional risks are those risks where the loss arises from
an exposure to the particular assets of a market.

18. Non-Directional risk arises where the method of trading is
not consistently followed by the trader.
Basis risk is due to the possibility of loss arising from
imperfectly matched risks.
Volatility risk is of a change in the price of securities as a
result of changes in the volatility of a risk-factor.

19. Purchasing power risk is also known as
inflation risk. It is so, since it emanates
(originates) from the fact that it affects a
purchasing power adversely. It is not
desirable to invest in securities during an
inflationary period.

21. Demand inflation risk arises due to increase in price, which
result from an excess of demand over supply. It occurs when
supply fails to cope with the demand and hence cannot
expand anymore. In other words, demand inflation occurs
when production factors are under maximum utilization.
Cost inflation risk arises due to sustained increase in the
prices of goods and services. It is actually caused by higher
production cost. A high cost of production inflates the final
price of finished goods consumed by people.

22. By: Muhammad Jahangir Khan

26.  Calculate
a cost
of equity and
incorporates risk.
Based on a
comparison of
systematic.

27. E(ri) = Cost of equity
Rf = Risk-free rate of return
E(rm) =Market return
β = Beta factor of individual security
E(ri) = Rf + β [E(rm) – Rf]

28. 1. Need to determine the excess return [E(rm) – Rf]
2. Need to determine risk-free rate.
3. Errors in the calculation of β values. As it
change overtime.

29. 1. Market Return
Excess Return
2. Risk-free Return

30. QUESTIONS