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1. MODULE 04
RISK & RETURNS

2. MEANING OF RISK
Risk can be defined as the Probability that the expected return from the security
will not materialize. Every investment involves uncertainties that make future
investment return risk-prone. Uncertainties could arise due to the political,
economical and industry factors.

3. CAUSES OF RISK
 Wrong decision of what to invest in.
 Wrong timing of investment may cause higher risk and less returns.
 Maturity period or the length of investment: the larger the period, the more risky is
the investment normally.
 Amount of investment: the higher the amount invested in any security the larger is
the risk, while a judicious mix of investment in small quantities may be less risky.
 Method of investment, namely secured by collateral or not.
 Natural calamities such as acts of god etc..

4. TYPES OF RISK
TYPES OF RISK
SYSTEMATIC RISK UNSYSTEMATIC RISK
> Uncontrollable by Co. > Controllable by an Co.
> Macro in nature. > Micro in nature.

5. ADVANTAGES OF RISK
 Higher Potential Returns: Generally, investments with higher risk have the potential
to generate higher returns. Risk and return are often positively correlated.
 Innovation and Growth: Risk-taking is essential for innovation and economic growth.
Entrepreneurs and businesses that take calculated risks by investing in new ideas,
products, or technologies.
 Learning and Adaptation: Embracing risk can lead to valuable learning experiences
and personal growth. By stepping outside of comfort zones and confronting challenges.
 Competitive Advantage: Businesses that effectively manage and mitigate risks can
gain a competitive edge in the marketplace.
 Opportunity Identification: Risk-taking enables individuals and organizations to
identify and capitalize on opportunities that others may overlook.

6. DE-MERITS OF RISK
 Losses and Financial Hardship: Investments with higher risk levels carry a greater
chance of losing money, which can lead to financial hardship for individuals,
businesses, and investors.
 Uncertainty and Anxiety: Risk introduces uncertainty and unpredictability into
decision-making processes. This uncertainty can create anxiety and stress for
individuals and organizations.
 Reputation Damage: Failed risk-taking endeavors can damage the reputation and
credibility of individuals, businesses, and institutions.
 Overconfidence and Hubris: Excessive risk-taking can foster overconfidence and
hubris, leading individuals or organizations to underestimate potential risks and
overestimate their abilities to manage them.
 Debt and Leverage Risks: Borrowing money or using leverage to finance investments
can amplify both potential gains and losses.

7. MEANING OF RETURNS
Returns in investment refer to the financial gains or losses generated by an
investment over a specific period of time. It represents the performance of an
investment and is typically expressed as a percentage of the initial investment
amount.

8. TYPES OF RETURNS
 Total Return: The overall gain or loss on an investment over a specified period,
considering all sources of income and changes in the investment's value.
 Annualized Return: The average annual return on an investment over a specific
period, calculated to provide a standardized measure of performance.
 Percentage Return: The return expressed as a percentage of the initial investment
amount.
 Real Return: The return adjusted for inflation, reflecting the purchasing power of
the investment's gains or losses.

9. COMPONENTS OF RETURNS
i. Capital Appreciation: This refers to the increase in the value of the
investment over time. For example, the price appreciation of stocks or
real estate.
ii. Yield/Income: the interest or dividend received is called yield.

10. DIFFERENCE BETWEEN RISK & RETURN
BASIS RISK RETURN
Meaning Risk can be defined as the
probability that the
expected return from the
security will not
materialize.
The return on investment in
assets takes the form of
dividend or interest income
and appreciation in the
price of the asset.
Forces The main forces
contributing to risk are
price and interest.
Returns are the gains or
losses from a security in a
particular period.
Types ~Systematic risk
~Unsystematic risk.
Return can be realized
return and expected return.
Measurement Measured through
behavioral methods and
quantitative/statistical
methods.
It can be measured through
traditional and modern
methods.
Objective To minimize the risk. To maximize the returns.

11. • Systematic Risk
 Meaning :
Systematic risk refers to the risk inherent to the entire market or market
segment. Systematic risk, also known as undiversifiable risk, volatility risk, or
market risk, affects the overall market, not just a particular stock or industry.

12.  Advantages of Systematic Risk :
• It provides an opportunity for investors to diversify their portfolios across different
asset classes and industries.
• It prompts systematic risk encourages long-term investment strategies and
discourages short-term speculation.
• It prompts investors to consider macroeconomic factors and market trends in their
decision-making process.
• Enhanced understanding of systemic risks in finance.
• Informed decision-making for regulatory measures.

13.  Disadvantages of Systematic Risk :
• Difficulty in identifying all possible sources of future threats.
• Lack of easy ways to reduce its impact on the system's performance.
• Wider impact affecting everyone.
• Difficulty in analyzing impact on distinct stocks, sectors, and businesses.
• Variability in the scale of impact across different businesses and sectors.
Types of Systematic Risk in Finance :
1) Interest Rate Risk
2) Market Risk
3) Purchasing Power/ Inflationary Risk

14. UNSYSTEMATIC RISK
Unsystematic risk is the risk that is unique to a specific company
or industry. It's also known as nonsystematic risk, specific risk,
diversifiable risk, or residual risk.
Types of Unsystematic Risks
1}Business risk
2}Financial risk and
3}Operational risk

15. IMPORTANCE OF UNSYSTEMATIC RISK
Understanding unsystematic risk is essential for successful
investing, as it allows investors to make informed decisions about
asset allocation, risk management, and investment strategies.
Investors should recognize the importance of managing
unsystematic risk through diversification, due diligence, and active
portfolio management.

16. ADVANTAGES OF UNSYSTEMATIC RISK
1}This risk relates to only a particular company or industry and not the
overall economy.
2}The factors that lead to risk are internal. Therefore internal monitoring
and measures can help avoid or minimize the risk.
3}The severity of the unsystematic risk is usually lower than the
systematic risk. The duration of the impact is also lower than the
systematic risk.
4}As it is limited to company or industry the number of people affected is
smaller.

17. DISADVANTAGES OF UNSYSTEMATIC RISK
1}Such a risk can have an impact on the specific industry and cause
disruption, even when the economy is doing well.
2}Although the risk is specific to a company or industry, it can take
some time for things to return to normal. And, if any other issue
arises in between, the duration could be even longer.
3}At some point, unsystematic risk can lead to a permanent change
in the preference of the customers.
4}Unsystematic risks are usually not repetitive.This makes it
difficult for management to plan as they will face a new problem the
next time, and previous preparations are useless.

18. Difference Between Systematic Risk and Unsystematic Risk
SYSTEMATIC RISK UNSYSTEMATIC RISK
• Variability in a security's total
returns that is directly associated
with overall movements in the
general market or economy is
called systematic risk.
• The variability in a security's total
returns not related to overall
market variability is called the
non-systematic (non-market) risk.
Non-systematic risk is specific to
an industry or the company
individually.
• Systematic risks are external
risks which are uncontrollable
and broadly affect the
investments.
Unsystematic risks are internal risks
which are arises due to internal
environment of a firm or those
affecting a particular industry.
• Systematic risk covers interest
risk, market risk etc.
• Unsystematic risk contains
business and financial risk etc.

19. • Systematic factors are influenced by
factors such as securities market as
well as the economic, sociological,
political, and legal considerations of
prices of all securities in economy.
• Unsystematic factors are caused by like
labour strike, irregular disorganized
management policies, and consumer
preferences.
• The systematic portion results from
overall market influences.
• The unsystematic portion results from
company and industry influences.
• Examples of such industries are
foodstuffs, toys, and telephones.
• The electricity and power industries may
be pointed out as suitable example of
portraying unsystematic risk.

20. Systematic Risk
 Systematic risk, also called aggregate risk or market risk, refers to the unavoidable risks
that could affect a financial market and cause the values and prices of investments to
change. Because economic conditions rely on a variety of factors like politics,
regulations, purchasing power and employment, economists are typically aware of the
constant threats to all securities. Systematic risk is a term economists use to describe
this intrinsic vulnerability of financial markets.
 Systematic risk is dependent on market structure and the dynamics that may result in
shocks or uncertainty in an entire market. These shocks can originate from a variety of
sources like the international economy, government policy mandates or acts of nature.
To qualify as systematic, it's essential that these events impact the entire market.

21. Types Of Systematic Risk
Market Risk Interest Rate Risk Purchasing Power Risk
Absolute Risk
Relative Risk
Directional Risk
Non-Directional Risk
Basis Risk
Volatility Risk
Demand Inflation Risk
Cost Inflation Risk
Price Risk
Reinvestment Risk
Systematic Risk

22.  Market Risk :- Market risk is a measure of all the factors affecting the performance of
financial markets.
o Absolute Risk :- These situations cannot be predicted and are beyond anyone's control.
Absolute risk is also referred to as Pure risk.
o Relative Risk :- A measure of the risk of a certain event happening in one group
compared to the risk of the same event happening in another group.
o Directional Risk :- Those risks where the loss arises from an exposure to the particular
assets of a market.
o Non-Directional Risk :- Non-Directional risk arises where the method of trading is not
consistently followed by the trader.
o Basis Risk :- It is due to the possibility of loss arising from imperfectly matched risks.
o Volatility Risk :- It is the risk of an adverse change of price, due to changes in the
volatility of a factor affecting that price.

23.  Interest Risk :- Interest rate risk is the probability of a decline in the value of an asset
resulting from unexpected fluctuations in interest rates.
o Price Risk :- It is the risk of a decline in the value of a security or an investment
portfolio excluding a downturn in the market, due to multiple factors.
o Reinvestment Risk :- It is the probability that an investor will not be able to reinvest
cash flows, at a rate equal to their current return.
 Purchasing Power Risk :- Purchasing power risk is the possibility that you will not be
able to buy as much with your savings in the future.
o Demand Inflation Risk :- Demand inflation is a general and sustained increase in prices
due to demand that is too high in relation to supply. The lack of products and services
then automatically leads to inflation.
o Cost Inflation Risk :- It occurs when overall prices increase due to increases in the cost
of wages and raw materials. Higher costs of production can decrease the aggregate
supply, or the amount of total production, in an economy.

24. Types of Unsystematic Risk
Unsystematic Risk
Financial
Risk/Credit Risk
Business Risk/
Liquidity
Operational
Risk

25. 1}Business Risk
Business risk is also known as liquidity risk. It is so, since it emanates
(originates) from the sale and purchase of securities affected by business
cycles, technological changes, etc.
The Types of Business Risk
Assets Liquidity Risk
Business Risk/Liquidity
Risk
Funding Liquidity Risk

26. • Asset Liquidity Risk: Asset liquidity risk is due to losses arising from
an inability to sell or pledge assets at, or near, their carrying value
when needed. For e.g. assets sold at a lesser value than their book
value.
• Funding Liquidity Risk: Funding liquidity risk exists for not having
an access to the sufficient-funds to make a payment on time. For e.g.
when commitments made to customers are not fulfilled.
2}Financial or Credit Risk
Financial risk is also known as credit risk. It arises due to change in the
capital structure of the organization. The capital structure mainly
comprises of three ways by which funds are sourced for the projects.

27. The Types of Financial Risk
Financial Risk/Credit Risk
Exchange
Rate Risk
Recovery
Rate Risk
Credit
Event Risk
Non-
Directional
Risk
Sovereign
Risk
Settlement
Risk

28. A}Exchange Rate Risk: Exchange rate risk is also called as
exposure rate risk. It is a form of financial risk that arises from a
potential change seen in the exchange rate of one country's currency
in relation to another country's currency and vice-versa.
For e.g. investors or businesses face it either when they have assets
or operations across national borders, if they have loans or
borrowings in a foreign currency. In other words, all investors who
invest internationally in today's increasingly global investment arena
face the prospect of uncertainty in the returns after the convert the
foreign gains back to their own currency.
B}Recovery Rate Risk: Recovery rate risk is an often neglected
aspect of a credit-risk analysis. The recovery rate is normally needed
to be evaluated.
For e.g. the expected recovery rate of the funds tendered (given) as a
loan to the customers by banks, non- banking financial companies
(NBFC), etc.

29. C}Credit risk: Credit risk is the probability of a financial loss resulting
from a borrower's failure to repay a loan. Essentially, credit risk refers to
the risk that a lender may not receive the owed principal and interest,
which results in an interruption of cash flows and increased costs for
collection.
D}Non-Directional Risk: Non-Directional risk arises where the method
of trading is not consistently followed by the trader.
For e.g. the dealer will buy and sell the share simultaneously to mitigate
the risk.
E}Sovereign Risk: Sovereign risk is associated with the government.
Here, a government is unable to meet its loan obligations, reneging (to
break a promise) on loans it guarantees, etc.
F}Settlement Risk: Settlement risk exists when counterparty does not
deliver a security or its value in cash as per the agreement of
trade or business.

30. OPERATIONAL RISK
Operational risk is the risk of loss as a result of ineffective or failed internal processes, people,
systems, or external events that can disrupt the flow of business operations. These operational
losses can be directly or indirectly financial.

31. TYPES OF OPERATIONAL RISK
▶ Model risk – the risk of loss resulting from using insufficiently accurate
models to make decisions, frequently in the context of valuing financial
securities, and becoming prevalent in activities such as assigning consumer
credit scores, real-time probability prediction of fraudulent credit
▶ People risk – the risk of financial losses and negative social performance
related to inadequacies in human capital and the management of human
resources.
▶ Legal risk – The risk that a counterparty to a transaction will not be liable to
meet its obligations under law
▶ Political risk - The risk an investment’s returns could suffer as a result of
political changes or instability in a country.

32. OTHER TYPE OF RISK
▶ Regulation risk – the risk that a change to the laws or regulations will hurt a
business or investment by affecting that business, sector, or market.
▶ Bull Bear Market risk – A bull market occurs when securities are on the rise,
while a bear market occurs when securities fall for a sustained period of time
▶ Management risk - The risk—financial, ethical, or otherwise—associated with
ineffective, destructive, or underperforming management.
▶ Default risk - Also called default probability, is the probability that a
borrower fails to make full and timely payments of principal and interest,
according to the terms of the debt security involved.
▶ Industry risk – the factors that can impact (both positively and negatively) a
particular industry, which can in turn affect companies within the sector.

33. ▶ Liquidity risk – The risk of loss resulting from the inability to meet payment obligations in full
and on time when they become due.
▶ Country risk – The uncertainty associated with investing in a particular country, and more
specifically the degree to which that uncertainty could lead to losses for investors.
▶ Foreign exchange risk – The chance that a company will lose money on international trade
because of currency fluctuations.
▶ Interest rate risk - The probability of a decline in the value of an asset resulting from
unexpected fluctuations in interest rates

34. PORTFOLIO RISK AND RETURN
CONCEPTS

35. MEANING OF PORTFOLIO RISK
Portfolio risk refers to the potential for loss or variability in the
returns of an investment portfolio. It encompasses the uncertainty
associated with the performance of investments held within the
portfolio and is influenced by various factors, including the types of
assets held, their correlation with each other, and the overall asset
allocation.

36. MEANING OF PORTFOLIO RETURNS
 Portfolio returns refer to the profit or loss generated by a collection of
investments over a certain period of time. When you invest in various assets
such as stocks, bonds, real estate, or commodities, the combined performance
of these investments determines your portfolio return. It's typically expressed
as a percentage and can be calculated using various methods, including simple
returns, time-weighted returns, or money-weighted returns. Portfolio returns
are crucial for investors to assess the effectiveness of their investment strategy
and to measure their progress towards their financial goals.

37. ADVANTAGES

Portfolio returns offer several advantages for investors:
 Performance Evaluation: Portfolio returns provide a quantitative measure of how well an
investment portfolio is performing over a specific period. By comparing returns to
benchmarks or targets, investors can assess whether their investment strategy is meeting their
objectives.
 Decision Making: Understanding portfolio returns helps investors make informed decisions
about asset allocation, diversification, and risk management. By analyzing historical returns,
investors can identify which assets contribute most to performance and adjust their portfolio
accordingly.
 Goal Tracking: Portfolio returns enable investors to track their progress toward financial
goals. Whether it's saving for retirement, education, or other objectives, monitoring returns
helps investors stay on track and make any necessary adjustments to achieve their goals.

38.  Risk Management: Assessing portfolio returns allows investors to evaluate the risk-adjusted
performance of their investments. By considering both returns and risk metrics such as
volatility, investors can better understand the trade-offs between risk and return in their
portfolios.
 Performance Attribution: Portfolio returns help investors understand the drivers of
performance. By analyzing the contributions of individual assets or asset classes to overall
returns, investors can identify sources of outperformance or underperformance and adjust
their investment strategy accordingly.
 Communication: Portfolio returns provide a common language for discussing investment
performance among investors, financial advisors, and other stakeholders. Whether reporting
to clients, stakeholders, or regulatory authorities, portfolio returns serve as a standardized
measure of investment performance.
 Overall, portfolio returns play a critical role in investment decision-making, goal tracking,
risk management, and performance evaluation, helping investors make informed choices and
achieve their financial objectives.

39. DISADVANTAGES

While portfolio returns offer valuable insights for investors, they also come with some
disadvantages:
 Incomplete Picture: Portfolio returns provide a summary of overall performance but may not
capture the full complexity of an investment portfolio. They may overlook factors such as
transaction costs, taxes, and other expenses, which can significantly impact net returns.
 Short-Term Focus: Portfolio returns are typically calculated over specific time periods, such as
daily, monthly, or annually. This short-term focus may lead investors to make decisions based on
temporary fluctuations in performance rather than long-term investment fundamentals.
 Benchmarking Challenges: Comparing portfolio returns to benchmarks or peer groups can be
challenging due to differences in investment objectives, asset allocation, and risk profiles. A
portfolio may outperform its benchmark in one period but underperform in another, making it
difficult to assess consistent performance.
 Volatility: Portfolio returns can be volatile, especially for portfolios with a high allocation to risky
assets such as stocks or commodities. While volatility is a natural part of investing, it can be
unsettling for investors who are not prepared for fluctuations in their portfolio's value.

40.  Risk-Return Trade-off: Portfolio returns do not provide a complete picture of risk. Two
portfolios with the same returns may have different levels of risk, depending on factors such
as volatility, correlation, and downside protection. Ignoring risk can lead investors to
overlook the true risk-return trade-off in their portfolios.
 Behavioral Biases: Investors may exhibit behavioral biases when interpreting portfolio
returns, such as overreacting to short-term performance or chasing past winners. These biases
can lead to suboptimal investment decisions and undermine long-term performance.
 Lack of Context: Portfolio returns alone may lack context without considering factors such
as investment objectives, time horizon, and investor preferences. A high return may be
desirable, but it's essential to consider whether it aligns with the investor's goals and risk
tolerance.
 Overall, while portfolio returns provide valuable information for investors, it's essential to
consider their limitations and use them in conjunction with other measures to make informed
investment decisions.

41. IMPORTANCE/SCOPE/BENIFITS

Portfolio returns are crucial for several reasons:
 Performance Evaluation: Portfolio returns serve as a primary measure of how well an
investment portfolio is performing. Investors can compare returns to benchmarks, targets, or
peer groups to assess whether their investment strategy is meeting expectations.
 Goal Tracking: By monitoring portfolio returns, investors can track their progress toward
financial goals such as retirement, education funding, or wealth accumulation. Returns help
investors gauge whether they are on track to achieve their objectives over time.
 Decision Making: Understanding portfolio returns informs investment decisions such as
asset allocation, diversification, and risk management. Investors can adjust their portfolios
based on performance data to optimize returns while managing risk according to their
investment objectives and risk tolerance.
 Risk Assessment: Portfolio returns provide insights into the risk-adjusted performance of
investments. Investors can evaluate whether the returns adequately compensate for the level
of risk taken, helping to ensure a balanced risk-return profile in the portfolio.

42.  Performance Attribution: Analyzing portfolio returns allows investors to identify the
drivers of performance. By assessing the contributions of individual assets or asset classes to
overall returns, investors can make informed decisions about portfolio rebalancing or
adjusting their investment strategy.
 Communication: Portfolio returns serve as a standardized metric for communicating
investment performance to stakeholders such as clients, partners, or regulatory authorities.
Clear reporting of returns facilitates transparency and accountability in investment
management.
 Continuous Improvement: Regularly monitoring portfolio returns enables investors to learn
from past performance and refine their investment approach over time. By identifying areas
of strength and weakness, investors can adapt their strategies to enhance future returns and
achieve better outcomes.
 Overall, portfolio returns play a vital role in guiding investment decisions, tracking progress
toward financial goals, assessing risk, and communicating performance to stakeholders. By
understanding and leveraging portfolio returns effectively, investors can optimize their
investment portfolios and work toward achieving long-term financial success.

43. TYPES
 There are several types of risk that contribute to portfolio risk:
 Market Risk: Also known as systematic risk, market risk arises from factors that affect
the overall performance of financial markets, such as economic conditions, interest
rates, inflation, and geopolitical events. Market risk impacts all investments to some
extent and cannot be diversified away.
 Specific Risk: Also known as unsystematic risk or idiosyncratic risk, specific risk
arises from factors specific to individual assets or companies, such as management
changes, competitive pressures, or product recalls. Specific risk can be reduced through
diversification across different securities or asset classes.
 Liquidity Risk: Liquidity risk refers to the risk that an investment cannot be quickly
bought or sold in the market without significantly affecting its price. Illiquid
investments may be subject to wider bid-ask spreads and greater price volatility, which
can increase the risk of loss.

44.  Credit Risk: Credit risk arises from the possibility that issuers of fixed-income
securities may default on their obligations to pay interest or repay principal. Credit risk
varies depending on the creditworthiness of the issuer and can affect the value of bonds
and other debt securities held in a portfolio.
 Currency Risk: Currency risk, also known as exchange rate risk, arises from
fluctuations in exchange rates between currencies. For investors holding assets
denominated in foreign currencies, changes in exchange rates can impact the value of
their investments when translated back into their home currency.
 Interest Rate Risk: Interest rate risk refers to the risk that changes in interest rates will
affect the value of fixed-income investments such as bonds. When interest rates rise,
bond prices typically fall, and vice versa, leading to potential losses for bondholders.

46. EXPECTED RETURNS OF A PORTFOLIO
“DON’T PUT ALL YOUR EGGS IN THE ONE BASKET”

47. MEANING OF PORTFOLIO RETURNS.
Portfolio returns refer to the gains or losses generated by a portfolio of
investments over a specific period of time. It represents the overall performance of
an investment portfolio, taking into account of all the assets held within it. These
returns are typically measured in terms of a percentage increase or decrease in the
value of the portfolio relative to its initial investment.

48. METHODS TO ESTIMATE EXPECTED RETURNS
OF PORTFOLIO.
 Historical Returns: Analyzing the historical performance of the assets within the
portfolio and using this data to estimate future returns. However, it's important to note
that past performance does not guarantee future results.
 Capital Asset Pricing Model (CAPM): CAPM is a widely used model in finance that
estimates the expected return of an asset based on its risk relative to the overall market.
It considers the risk-free rate of return, the expected market return, and the asset's beta
(a measure of its volatility relative to the market).
 Arbitrage Pricing Theory (APT): APT is another asset pricing model that considers
multiple factors influencing asset returns, such as interest rates, inflation, and various
economic indicators.
 Analyst Forecasts: Analysts often provide forecasts for the future performance of
individual assets or sectors based on their research and analysis. Investors can use these
forecasts to estimate the expected returns of their portfolio.

49.  Simulation and Monte Carlo Analysis: These techniques involve running simulations
based on different scenarios and assumptions to estimate the range of possible portfolio
returns and their probabilities.
It's important to remember that expected returns are estimates and not guarantees. Actual
returns may vary due to unforeseen events, changes in market conditions, and other factors.
Importantly, investors should consider the level of risk associated with their portfolio when
estimating expected returns, as higher expected returns generally come with higher levels
of risk.

50. TYPES OF PORTFOLIO RETURNS.
 Total Portfolio Return: This represents the overall return generated by a portfolio over
a specific period, & may include Gains or Losses.
 Realized Return: Realized returns are the actual gains or losses realized by selling
assets within the portfolio & will Reflect in the evaluation of performance.
 Unrealized Return: Unrealized returns, also known as paper returns, represent the
gains or losses on assets that have not been sold & will not reflect in the evaluation.
 Absolute Return: Absolute return measures the total return of a portfolio without
comparing it to any benchmark or index.
 Relative Return: Relative return will also measure the total returns but by comparing
the performance of a portfolio to a benchmark or index.

51. FORMULA TO CALCULATE EXPECTED RETURNS
OF PORTFOLIO.
 The expected return of a portfolio can be calculated using a weighted average of the
expected returns of its individual assets.
∑ (Rp) = WA (RA) + WB (RB)
Where, ∑ (Rp) = Expected return from a portfolio of two securities.
WA = Proportion / Weights of Asset A
RA = Expected return of asset A
WB = Proportion / Weights of Asset B
RB = Expected return of Asset B.

52. • Example: Asset 1 with an expected return of 8% and a weight of 30%.
Asset 2 with an expected return of 6% and a weight of 50%.
Sol: E (Rp) = WA (RA) + WB (RB)
0.3 × 0.08 + 0.5 × 0.06
0.024 + 0.03
0.054 × 100
5.4%

53. Limitations of Expected Returns of Portfolio.
• Doesn't Guarantee real returns
• Based on Historical data
• Based on several Assumptions and thoughts
• Weighted Average can exclude various information.

54. THANK YOU!!