Dr. Lokanandha Reddy Irala(www.irala.org) 1 What is Risk? Dr. Lokanandha Reddy Irala www.irala.org.

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Presentation transcript:

Dr. Lokanandha Reddy Irala( 1 What is Risk? Dr. Lokanandha Reddy Irala

Dr. Lokanandha Reddy Irala( 2  Uncertainty?  Loss?  Exposure to the chance of loss? ……… Not a chance of profit?  Variation in the out comes? ………. Both Negative and Positive? What is risk?

Dr. Lokanandha Reddy Irala( 3  As an average deviation form mean  …. Standard Deviation Measuring Risk

Dr. Lokanandha Reddy Irala( 4 o Business Risk ……Being in Business o Product Risk ……Products fail in good markets even o Market Risk ……Even good products may not sell in bad markets o Country Risk ……All countries are not equally good to do business in o Economic Risk ……We may have good countries- but bad economies o Political Risk ……..Politicians may not be bad -but politics might be o Currency Risk ……..Currencies may not change -but their exchange rates do Forms of risk

Dr. Lokanandha Reddy Irala( 5 Inflation Risk … Rising prices might out pace your investment gains Credit Risk …Some of the borrowers might turn defaulters Interest Rate Risk … Interest rates are not constant forever Reinvestment Risk... Reinvestment opportunities are not ready made Forms of Risk…

Dr. Lokanandha Reddy Irala( 6 Operating Vs. Financial Risk Total Vs. Component Risk Unique Vs. Systemic Risk Types of Risk

Dr. Lokanandha Reddy Irala( 7 ……You get returns !!!!!!!!!!!! No Risk ……………Risk free return Risk ……………Risk free return + Risk premium High Risk … High Risk Premium … High Returns Low Risk … Low Risk Premium … Low Returns Why Taking Risk?

Dr. Lokanandha Reddy Irala( 8 Can I take the highest risk? …….fundamental idea remains that there's no reason to expect reward just for bearing risk. Otherwise, you'd make a lot of money in Las Vegas ……….Sharpe(1998)

Dr. Lokanandha Reddy Irala( 9 How do I know my Risk level ? ……. Indifference curves What is the optimal risk level?