Risk and Return Journal - Assignment Example

Risk and Return Introduction Risk is the probability that business’ projected income might not be the same as the real income. In business, risk includes the possibility of losing part of or the entire original investment. Risk and return are directly proportional, the higher the risk, the higher, and the return. An ordinary inaccurate understanding among investors is that higher level of risk guarantees high returns, but the reality is that high risk only increases the chance of getting high returns.

In reference to the video, it is crucial to investors to maintain an appropriate balance between risk and return to ensure a favorable risk-return trade-off. This journal examines the importance of risk and returns balance (De Bondt and Werner, 1993). Investing in a risk-free portfolio leads to low or no return on investment. For example, an investment in risk-free government bonds yields slight returns on investments. Investors tend to increase their profits by venturing into riskier portfolios.

Increasing income is the primary function of doing business, so it is necessary to venture into a substantial amount of risk to achieve this objective. Keeping this in mind it is necessary also to note that taking on a large risk does not necessarily guarantee high returns. There are two aspects of risk, first is the probability of loss on investment. For example, if an investment yields lower returns than expected. Then there is the possibility of earning more than what is. For instance waiting to get 11% return rate but getting a 13% return rate (Bailey, 1994).

It is important to maintain a risk and return balance to reduce exposure to losses brought about by risk. When evaluating the risk and return balance, the investment period is arguably the most important factor to be. If the investment period is long, it is advisable to maintain a relatively higher risk tolerance level. If the investment period is short, an investor is advised to maintain a lower risk tolerance level. Another equally important factor is risk capital that is the amount of funds available to trade without affecting daily business operations.

Having many risks capital gives one freedom to trade in high-risk investments. On the other hand, having a small amount of risk capital limits one’s freedom to sell in high-risk investments (Bailey, 1994). The amount of investment experience held is another important factor. Relatively new investors are not advised to commit significant sums of capital. However, experienced investors with enough knowledge on risk can invest considerable amounts of money. The objectives and type of investment also involved affecting the risk-return balance.

If the investment objective is saving, it is appropriate to take caution and not pursue risky ventures. If the aim is to grow capital, it is encouraged to venture into high-return high-risk investments to achieve this objective (Bailey, 1994).Conclusion Risk and return balance plays a significant role in making investment decisions in modern-day organizations. When trading in stock markets, companies and investors are exposed to opportunities and risks. To take advantage of opportunities and not be too exposed to risk, companies have to maintain an appropriate risk and return balance.

Therefore, before committing a significant amount of funds, it is advisable to evaluate a company’s investment objective, investment period and its experience in dealing with risk. Doing this will lead to making informed decisions that are fundamental to increasing returns and reducing its exposure to risk. References Bailey, W. (1994). Risk and return on Chinas new stock markets: Some preliminary evidence. Pacific-Basin Finance Journal, 2(2), 243-260.De Bondt, Werner PM (1993). "Betting on trends: Intuitive forecasts of financial risk and return.

" International Journal of forecasting 9.3): 355-371.