What is Risk?
Dr. Lokanandha Reddy Irala
www.irala.org
Dr. Lokanandha Reddy Irala(www.irala.org)
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What is risk?
 Uncertainty?
 Loss?
 Exposure to the chance of loss?
……… Not a chance of profit?
 Variation in the out comes?
………. Both Negative and Positive?
Dr. Lokanandha Reddy Irala(www.irala.org)
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Measuring Risk
As an average deviation form mean

…. Standard Deviation
Dr. Lokanandha Reddy Irala(www.irala.org)
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Forms of risk
oBusiness Risk
……Being in Business
o Product Risk
……Products fail in good markets even
oMarket Risk
……Even good products may not sell in bad markets
oCountry Risk
……All countries are not equally good to do business in
oEconomic Risk
……We may have good countries- but bad economies
oPolitical Risk
……..Politicians may not be bad -but politics might be
oCurrency Risk
……..Currencies may not change -but their exchange rates do
Dr. Lokanandha Reddy Irala(www.irala.org)
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Forms of Risk…
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
Dr. Lokanandha Reddy Irala(www.irala.org)
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Types of Risk
Operating Vs. Financial Risk
Total Vs. Component Risk
Unique Vs. Systemic Risk
Dr. Lokanandha Reddy Irala(www.irala.org)
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Why Taking Risk?
……You get returns !!!!!!!!!!!!
No Risk
……………
Risk free return
Risk
……………
Risk free return
+ Risk premium
High Risk … High Risk Premium
Low Risk … Low Risk Premium
Dr. Lokanandha Reddy Irala(www.irala.org)
…
High Returns
… Low Returns
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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(www.irala.org)
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What is the optimal risk level?
How do I know my Risk level ?
……. Indifference curves
Dr. Lokanandha Reddy Irala(www.irala.org)
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