|
|
  |
Financial ConceptsRisk and ReturnAlmost all investments carry risk and yield return. Usually, higher the risk higher the return, lower the risk lower the return. However, a general understanding of this phenomenon is not sufficient to make appropriate decisions relating to investments. A more quantifiable analysis is required to understand investments better. The quantifiable analysis is done by use of simple arithmetic and statistics to analyse the relationship.Return: A return from any investment can be calculated simply by subtracting the amount invested from the final amount realised. The figure of return thus obtained is a relative figure. Profit = (Final amount realised � Amount Invested)
Comparison of two
such investments can be made by taking out the absolute value of returns from
such investments. The absolute value of returns is the return percentage. The
return obtained (profit or loss) multiplied by 100 and divided by the amount
invested.Loss = (Amount Invested � Final Amount Realised) Profit / Loss Percentage = Profit / Loss * 100 / Amount Invested
Returns can be
calculated for either specific periods or for a combination of periods
together. For example, if one invested $50 in a stock in the beginning of 1st
year and got a return of $10 as dividend at the end of 1st year and
finally on selling of his investments after the end of 5th year got
$150 then we can represent the above returns as follows:Absolute Profit for 5 years = $10 (dividend) + ($150 - $50) = $110
Of all the above representations of returns the last one, namely, annualised average profit percentage is the most appropriate to understand and compare returns. It is widely used in all financial and investment decision-making.Average Profit for 5 years = $110/5 = $22 Profit Percentage = $110 * 100 / $50 = 220% return Average Profit Percentage annualised = 220%/5 = 44% Risk: Risk refers to the dispersion or deviation of returns from the average return of such investment. Risk is measured by calculating Standard Deviation.
|
 |
