Risk and Return Relationship - Essay Example

The essay "Risk and Return Relationship" talks about the characteristics that can influence risk as the probability of losing anything of value or uncertainty of a result. This paper also analyzes the risk and return relationship which is fundamental to the potential investment decisions. The risk is an outcome of those actions which are taken regardless of uncertainty. The characteristics that can control or influence risks are as follows: Using debt: Using debt in the business increases the chances of risk bear by shareholders, but it also results in the higher rate of returns.

Optimal capital structure: Making use of optimal or most favorable capital structure balances the pressure or influence of risk and maximizes the stock price of the company. Aggressive management: Risk can be influenced by the aggressive management. The aggressive managers of the firm are more prone to utilize debt in order to increase profit. The relationship between risk and return is fundamental to the investment decisions, whether assessing a sole investment or selecting between different investments.

Potential investors evaluate the relationship between risk and return when they have to make a decision regarding investment in securities like bonds or shares. It has been discovered that there is a positive connection between the risk and return. The securities which are riskier provide a greater return. However, Bowman found that there is a distinct and significant negative relationship between risk and return.