Master Note of Accounting and Finance

Meaning of Risk The term 'risk' can be defined as the probability of something bad happening. In other words, it is an actual outcome or investment's return that differ from expected outcome or return. It includes the possibility of losing all or some of an original investment. Mathematically, Risk = Sum [Actual Return - Expected Return] i.e. Risk = Sum [R- R Bar] Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for- Emmet J. Vaughan and Theres Vaughan In finance, it is generally representing by sigma i.e. standard deviation of various outcomes. Types of Risk There are various kinds of risk that can be categorized into the following basis: Based on Chance of Occurrence: Pure and Speculative Based on Flexibility: Static and Dynamic Based on Measurability: Financial and Non-Financial Based on Coverage: Fundamental and Particular Based on Behavior: Subjective and Objective Based on Diversifica...

Meaning of Return The term 'return' can be defined as a certain extra amount that is received from initial investment amount. Mathematically, it can be expressed as: Return = Terminal Wealth - Initial Wealth Where,  Terminal Wealth = Maturity amount Initial wealth = Investment amount Return on Investment (ROI) is the ratio of benefit and cost. It is also known as Return on Cost (ROC). Higher the ratio the greater the benefit and lower the ratio lower the benefit. It helps the investor whether to take or skip the investment opportunity by calculating ROI.  Forms of Return Basically, there are following types of returns that can be received from the company mentioned as bellows: Capital Gain Return = Amount increment in unit price  i.e. P1-P0 Dividend Return = Extra amount received from the company as a Dividend i.e. D1 Interest Return = Certain fixed percentage gain on initial amount in a fixed period of time (Investment * Interest Rate) Othe...