RETURN

The gain or loss of a security in a particular period. The return consists of the Income and Capital gains relative on an investment. It is usually quoted as a percentage.

CAPITAL GAIN
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to its purchase price.

Measurement of Return
Return=Income + Capital gain P1-P0 D R= +
P0 P0 Where D= dividend P0= Price at the beginning of the period i.e purchase price P1= Price at the end of the period i.e selling price

RISK
The chance that an investment's actual return will be different than expected.
This includes the possibility of losing some or all of the original investment. It is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.

Types of risk

Systematic Risk
Risk

Unsystematic Risk

that cannot be reduced or predicted in any manner and it is almost impossible to predict or protect yourself against this type of risk. Examples of this type of risk include interest rate increases or government legislation changes. The smartest way to account for this risk, is to simply acknowledge that this type of risk will occur and plan for your investment to be affected by it.

Risk that is specific to an assets features and can usually be eliminated through a process called diversification . Examples of this type of risk include employee strikes or management decision changes.

Risk of a Portfolio Standard deviation of return Variance return

Covariance is the statistical measure that indicates the interactive risk of a security relative to others in a portfolios of securities. Covariance between two securities X and Y may be calculated using the formula:
N

[RX-RX] [RY-RY] Covxy =

i=1

Covxy=covariance between x and y Rx=return of security x Ry=return of security y Rx=expected return or mean return of security x Ry=expected return or mean return of security y N= no.of observations If covariance is +ve Returns of two securities are in same direction -ve Returns of two securities are in opposite direction zero Returns are independent of each other

Coefficient of Correlation
To facilitate comparison in returns Covxy rxy= x y Can range from 1 to 1 r Covxy= xy x y -1= perfectly negative correlation +1= perfectly negative correlation 0=returns are independent

Variance of a portfolio(two securities)

p2 =x12 12+ x22 22 +2x1x2(r12 1 2) p2=portfolio variance x1 =proportion of funds invested in first security x2= proportion of funds invested in second security r12 =correlation coefficient between the returns of first and second security 1 =standard deviation of of first security 2 =standard deviation of of second security