Definition of Return and Risk
The (rate of) return on an asset/investment for a given period, say a year, is the annual income received plus any change in market price, usually expressed as a per cent of the opening market price. Symbolically, the one-period actual (expected) return, R
If the price of a share on April 1 (current year) is Rs 25, the annual dividend received at the end of the year Re 1 and the year-end price on March 31 is Rs 30, the rate of return = Re 1 = 0.24 – 24 per cent. The rate of return of 24 per cent has two components:
(i) Current yield, i.e. annual income + beginning price = Re 1/Rs 25 = 0.04 or 4 per cent and (ii) Capital gain/loss = (ending price – beginning price) + beginning price = (Rs 30 – Rs 25)/ 25 = 0. -0 = 20 percent.
The variability of the actual return from the expected returns associated with a given asset/investment is defined as risk. The greater the variability, the riskier the security (e.g. shares) is said o be. The more Certain the return from an asset (e.g. T-bills), the less the variability and, therefore, less the risk.