risk and return of individual assets

• today we know exactly what amount of wealth will obtain in the future that is the return is known and the risk will be equal to aero. whereas for a risky asset today when we are investing we do not know exactly what we will obtain in the future that is there is an uncertainty.

  Return would be equal to rs106-asset A- [t1 rs98 + rs114]/asset b [t1 rs50+rs162]

  on the average both A and B offer the same return therefore an Investment decision cannot be taken in the return criteria and the risk criteria will be use .
• normally there is more incertainty when the outcomes are more disposed around the average value . when comparing asset A and B there is a bigger dirpersion of the outcome around the average value . therefore b is more risky than a and rational individual would choose asset A over assrt B, given that for the same average return it has a lower risk.
• the return on investment of an asset.

  tHe return measure the increase or decrease obtain of an investment. $FINAL VALUE - INITIAL VALUE/ INITIAL WEALTH$
• the return can be often a nominal value .the return can also be negative . the above formulae can easily be used to find the return of non risky assets. wheras if the asset is risky we would not know the final wealth in which case we would be estimating the return and more specifically we would be calculating the expected rate of return.
• to find the expected rate of return $P1R1+$$P2R2+$$P3R3+$$PNRN$
• Risk of an investment for assets

  the risk of an investment will be measured by considering the dispersion of the outcomes aroud the value or expected value of the return . the bigger the dispersion of the outcome the higher will be the risk . the dispersion of the risk is quantify by using two statistical measure namely

  [1]variance

  [2]standard deviation

  $variance =$$E ps[rs-E[r]]2$