This possibility of variation of the actual return from the expected return is termed as risk. This is the fundamental risk/return consideration in the makeup of a company's financing. Explain how understanding risk and return will help you in future business ventures. Explain which is more risky bonds or common stocks. Create a 1,050-word report, and include the following: Explain the relationship between risk and return Identify an example of risk and return. Risk and Return. The portfolio return r p = 0.079 with the risk σ p = 0. A central issue in investing is finding the right combination of risk and return. For this reason, a company can use debt rather than additional equity to finance its operations and magnify the profits with respect to the current equity investment. NON - SYSTEMATIC RISK:
The return from a security sometimes varies because of certain factors affecting only the company issuing such security. Risk is Relative: The risk associated with the investments in stocks of Company XYZ generally decreases as more and more investment is made in different stocks of other uncorrelated companies. Ratios such as Sharpe ratio, Treynor’s ratio, Sortino ratio, etc. The Company with a higher return of 11.5% has a higher risk than the other company. Risk-Return Tradeoff Definition. It is important to analyze and attempt to quantify the relationship between risk and return. Examples are raw material scarcity, Labour strike, management efficiency etc. AN INTRODUCTION TO RISK AND RETURN CONCEPTS AND EVIDENCE by Franco Modigliani and Gerald A. Pogue1 Today, most students of financial management would agree that the treatment of risk is the main element in financial decision making. Companies can be ranked in the order of return and variance and select into the portfolio those companies with higher returns but with the same level of risk. Format your assignment consistent with APA guidelines. It is clear from an example in which a person is running a particular business that provides him return of $200,000 per month.
When variability of returns occurs because of such firm-specific factors, it is known as unsystematic risk.
7. At the same time, losses are also magnified through this financial leverage. and coefficient of variation measure return per unit of investment risk.. Need introduction, conclusion, and […] Risk-averse investors attempt to maximize the return they earn per unit of risk. Risk is the variability in the expected return from a project. The above can be checked with the capital weightage formulas for the minimum variance (risk).Substituting A risk averse investor selects an investment which gives the lowest risk for a given level or return (or the highest return for a given level of risk) d. Assume that expansion B's most likely outcome is 21% per year and that all other facts remain the same. In other words, it is the degree of deviation from expected return. 0979. 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