Measurement of Risk and Returns Securities and Portfolios

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Aim

Aim of this topic is to make expert the students and investors in financial analysis.

Explanation : When a person starts his own work, then either he will get profit or loss and this is not sure and the possibility of this uncertainty is called risk. Loss is one of major risk of business and main motive of financial analysis is to reduce risk of loss. It is also general rule higher risk and higher return but modern concept is just opposite this , it is lower risk and higher profit. In financial market, Company issues and also invests in shares and company
Measurement of Risk is with the help of financial mathematics and financial risk management. Company uses modern portfolio theory for getting maximum return on minimum risk.

Reasons of Risk

1. Some longer-term consequences of disasters
2. such as lawsuits
3. loss of market confidence and employee morale and impairment of brand names can take a long time to play out

For this following procedure is adopted for making good Portfolios

1. Calculation the value at Risk

Risk of investment is measured on the basis of Standard deviation . It is variation of actual and standard performance on the investment .

Prof. Razvan Pascalau, Univ. of Alabama has made simple online value at risk calculator which is very helpful for investors

2. Calculation of portfolio

After calculation of Risk , we can make portfolio by applying mathematical formula .

Return is the weighted average of the risk free asset, f, and the risky portfolio, p, and is therefore linear:

Since the asset is risk free, portfolio standard deviation is simply a function of the weight of the risky portfolio in the position. This relationship is linear