Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Risk-Return Concepts - Essay Example

Comments (0) Cite this document
For a potential investor, the market presents an array of financial instruments where money can be invested into. The primary motivating factor in choosing investment is the expected returns to be generated. However, it should be noted that the decision in selecting the "right" investment is also largely dependent on the investor's perceived risk…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91% of users find it useful
Risk-Return Concepts
Read TextPreview

Extract of sample "Risk-Return Concepts"

Risk-Return Concepts For a potential investor, the market presents an array of financial instruments where money can be invested into. The primary motivating factor in choosing investment is the expected returns to be generated. However, it should be noted that the decision in selecting the "right" investment is also largely dependent on the investor's perceived risk. It is irrefutable that most investors already have this preset conception of what type of investment is likely to give him more profits and gains in the future.
There is a widely held belief that an investment in the stock market is a no-win situation and only institutional investors reap profits. Thus, small investors concentrate on putting their money on government bonds, debt, and real estate. These decisions are somehow warranted due to the investor's aversion to risk. However, in addressing this situation, it is crucial to look at one of the core principles in finance-the risk-return concept.
The risk-return principle stipulates that the potential return of an investment rises with its potential risk (Risk-Return Tradeoff 2003). In other words, low risk investments generate low rewards to the investor while high risk ones presents probable returns. The risk and return principle clearly asserts that investors are faced with the tradeoff between risk and return. In line with this, an investment risk pyramid is devised in order to fully understand the equation of risk and return. The base of the pyramid is occupied by low risk-low return investments such as cash, cash deposits, notes, bills, and government bonds. It should be noted that these financial instruments often have a fixed return for a certain duration making investors less prone to financial default. The middle of the pyramid is occupied by medium risk investment like real estate, mutual funds, large/small capital stocks, and high income bonds and debt. At the peak of the pyramid, an investor is most likely to find options, futures, and collectibles as well as high risk securities (Determining Risk and Risk Pyramid 2003). Though the investments occupying the zenith of the pyramid are feared by investors because of their higher possibility of default, investors are entitled to higher rewards should they invest in high risk investments.
In conclusion, it can be seen that even small investors can win in the stock market. In fact, any investor putting his money in the stock market gains the possibility of generating higher than average returns. The high risk associated with investment in securities is warranted by high potential reward. However, these investors should overcome their risk aversion and have the knowledge of identifying stocks with high potential gains. As the risk-return principle has emphasized, high rewards entails taking huge amount of risks. It should also be stressed though, that it takes knowledge to choose good stocks and bravery to invest in securities.
Determining Risk and the Risk Pyramid, 2003, Retrieved 16 September 2006, from
Risk-Return Tradeoff, 2003, Retrieved 16 September 2006, from Read More
Cite this document
  • APA
  • MLA
(“Risk-Return Concepts Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Retrieved de
(Risk-Return Concepts Essay Example | Topics and Well Written Essays - 500 Words)
“Risk-Return Concepts Essay Example | Topics and Well Written Essays - 500 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


Understanding the concepts of realized return of the stock, systematic and unsystematic risk, risk of the portfolio, beta, WACC

...? Understanding the concepts of realized return of the stock, systematic and unsystematic risk, risk of the portfolio, beta, WACC Name: Course Title: Date: Q.1. Identify the components of a stock’s realized return. A.1. The realized return on stock is computed as the total amount of gains made on the same over a specific time period. Computation of the same takes into consideration the different gains emanating from the different assets held by the stock. It also takes into consideration the losses attributed owing to the alteration made in the value of respective assets taken previously. Thus the total realized value of the stock is the summation of the realized value of the different assets. Segregating the different factors...
4 Pages(1000 words)Assignment

Risk and return

... Risk and return are two inversely correlated concepts. A person or a corporation that is risk adverse will not take chances. Lower risk lead to lower returns and higher risk leads to higher returns. The general rule of higher risk leading to higher returns is not set in stone. One of the problems with higher risk is that it can lead to financial catastrophes. For example imagine a person that invests in a penny stock. Penny stocks are considered the most risky of all types of investments. The person decided to invest in penny stock X because he wanted the possibility of earning a higher return. Due to the risk associated with penny stocks the stock ended up defaulting due to the fact that the company went out of business...
4 Pages(1000 words)Essay

Risk and Return

...?Introduction Cost of equity is one of the critical and important tools through which investors can estimate the expected returns to be earned on anyproposed investment. Cost of equity therefore not only provides the expected returns figure but also takes into consideration any particular risks associated with any particular stock. The concepts of risk and return therefore are most important while estimating cost of equity and as such capital asset pricing model is considered as one of the most important models to estimate the cost of equity by correlating risk and reward with each other. It not only takes into account the risk free rate of return but also includes market risk premium while at the same time taking beta of the stock...
3 Pages(750 words)Term Paper

Risk and Return

...? Risk and Return The beta of a security measures the risk that cannot be minimized by diversification i.e. the systematic risk of the asset (MacKinlay 1995)t. The beta of the security can be calculated by the formula: Here, ? (Ri,Rm)=correlation of security I to that of the market ?(Ri)=standard deviation of security i And ?(RM)=standard deviation of the market security. By using this formula Beta of security A= =0.27 Beta of security B== 0.75 The capital asset pricing model gives us the formula for determining the expected return of the securities. According to CAPM, r = Rf +? (Km - Rf ) Where r= Expected return of the security Rf = Risk free rate ?=beta of the security Km= expected return of the market RA= 0.06+0.27(0.25-0.06) =0.1113...
8 Pages(2000 words)Assignment

Risk Assessment and Return Analysis

...? Risk Assessment and Return Analysis Risk Assessment and Return Analysis In investment, risk assessment and return analysis are vital elements are central to the payout structures of investment vehicles. The general utility theory asserts that the average investor dislikes risks and prefers investment vehicles with the least possible risk. Risk assessment entails the analysis of investment vehicles to discover their capacities to ensure sufficient returns on investment. Risk assessment entails the analysis of an asset’s standard deviation or risk with regard to the expected return on investment (Bodie, Kane & Marcus, 2006). This paper will provide a comprehensive risk assessment and return analysis of the investment portfolio encompassing...
3 Pages(750 words)Essay

Risk Assessment and Return Memo

... Rainier Ekstrom, Chief Executive Officer (CEO) Selecting The Portfolio And Investment Strategy Diversification of portfolio is important in order to achieve maximize the return and minimize the risk of the portfolio (Froot, Scharfstein, & Stein, 1993). In order to create portfolio, my most important priority has been to select four stocks after analyzing the risks and return of each of the stock. This would allow me to diversify the portfolio and make sure that the portfolio the risk is minimized and returns are maximized. To create a portfolio, I have selected four stocks of different companies belonging from different companies after analyzing different companies. The investment strategy previously adapted by Casta Bonita Ceramics has...
5 Pages(1250 words)Essay

Capital budgeting, Risk, Return, CAPM

...Capital Budgeting, Risk, Return, CAPM Supplementary Problem Interest=25 % of 20 billion = 5 billion Tax on the interest = 41 % of 5 billion = 205,000 000 Total amount = 5 billion + 2.05 billion = 7.05 billion This is the amount that Darth is prior to pay if he goes for a loan so as to acquire the Death star. That means Darth will pay 27.05 billion for acquiring the star. 8 billion * 15 years = 120 billion. This is the amount that Darth can pay if he acquires the Death star on lease. This gives that Darth is to seek for a bank loan so as to get the Death star without much expenses. Comparing to the amount that one can purchase this instrument with this is a lot more that would push the project far ahead. This gives the importance...
3 Pages(750 words)Assignment

Risk and Return Relationships Analysis

...Topic: Risk and Return Relationships Analysis Question The current financial markets have developed into huge trading factories that are dominated ultra-fast traders with an ability to swap stocks, futures as well as option and other aspects of the market in a matter of seconds (Saunders & White, 2003). The traders arbitrate between different markets and bounce between stick index futures, stock options and stocks in various exchanges through trading that drives profits at the exchanges. However, the stock market is neglecting one of its core aspects, the small companies and this has led to fewer companies going public with many of the small companies being acquired by larger ones (Anson, Fabozzi & Jones, 2011). It is important...
2 Pages(500 words)Coursework

Risk and Return Journal

...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...
2 Pages(500 words)Assignment

Risk and Return Relationship

...Finance and Accounting Table of Contents Question 9 3 A. Characteristics that can Influence Risk 3 B. Risk and Return Relationship 3 Positive Relationship 4 Negative Relationship 4 C. Actions to Mitigate Investment Risk 5 Question 10 5 Qualitative Methods used for Decision-Making Purposes 5 Force-field Analysis 5 Brainstorming 5 Rational Decision-Making 5 Question 9 A. Characteristics that can Influence RiskRisk is defined as the probability of losing anything of value or uncertainty of a result (Zack, 2006). It is also described as the intended interaction with improbability or uncertainty (Liu, et al., 2002). Values, for example financial wealth, social status or physical health can be lost or gained when threat/risk taking...
3 Pages(750 words)Essay

Critical Concepts in Political Science

Globalization, accompanied by liberal rhetoric, is accused in losses of the cultural identity, the insufficient accountability of large transnational corporations, deterioration of the rights of workers, an increase of distance between the rich and poor countries and between classes. Liberalism is also suspected in promoting the capture of authority by the countries of the West and in particular the USA above the whole planet.
The modern world experiences fundamental and dynamic changes. Transformation of international relations, the termination of confrontation and consecutive overcoming of consequences of the Cold War have expanded opportunities of cooperation on the international scene. The threat of the global nuclear con...
8 Pages(2000 words)Assignment

Risk Management of Space Tourism

The necessitates that adventure tourism is encouraged but after incorporating certain lessons learned in the process. Adventure tourism has led to advancements in technology. The economy of the region experiences growth and the cultural identity of the region remains intact. Risk and safety management has to be enforced through Codes of Conduct which could differ across sectors. Space tourism will result in positively impacting the economy and society while the environmental impact is minimal. Risk management, in this case, has been taken care of and this could bring about an absolutely new dimension in the field of adventure tourism.

The human mind is creative and forever looks for change, challenge, and adventure. Hum...
12 Pages(3000 words)Case Study

Free Will and Its Critical Concepts in Philosophy

... the idea of free will. We can’t have free choices if all plans about the past, present or future are already determined as either true or false? Theological determinism rejects free will because God is omniscient, predicts and directs the actions of the humans in advance (Shermer, 2004). Under this notion, determinism and free will can coexist. As obvious by the term itself, incompatibilism is in opposite of compatibilism. It says no free will can be exercised in the presence of a universe that determines all events beforehand. Two forms of incompatibilism are: HARD DETERMINISM: This theory accepts only idea of truth of determinism and rejects possibility of FREE WILL. METAPHYSICAL LIBERTARIANISM: This concept agrees...
8 Pages(2000 words)Assignment

Key Concepts of Counseling Psychology

Humans were born with the capacity to know and the freedom to choose between good and evil.  Given this freedom, we are responsible for our decisions, actions, and thoughts. Consequently, there is a need for therapy when an individual is unable or unwilling to accept personal responsibility for emotional problems.   We are not perfect therefore we make imperfect decisions. Therapy in this integrative approach attempts to get the client to live at peace with themselves in spite of mistakes. However, the level of peace depends on the extent to which one allows the environment to influence one’s inner world. Individuals, therefore, have the capability to improve themselves. Nonetheless, we have the tendency to develop...
6 Pages(1500 words)Assignment

Project Risk Assessment: Qualitative Versus Quantitative Approach

The risks may vary in terms of nature or scope according to the situation. So since the risk is so common in project management, a very important aspect of managing a project is analyzing all the possible risks that are associated with that particular project. It makes no sense of going on with a project and not giving a thought to the risks that could affect the success. Once these risks are analyzed, the project manager will have all the possible risks in front of him. He will know the degree of risk and also the benefits that the organization will get if the risk is taken. Therefore only after a risk analysis, the project manager is in a position to conclude whether or not it is worth taking the risk and going on with a certain...
6 Pages(1500 words)Assignment

Cloning Challenges Concepts of Societal Norms

This results in the creation of embryonic growth of another organism that contains the complete genetic code of the original organism. Through this process, the cloning of mammals has resulted in, to date, hundreds of cloned organisms born.
Those who oppose human cloning argue that this unnatural style of reproduction has an overwhelming potential for decisions being made based on reasons of vanity in regard to children. Their concern is that the very nature of the traditional family is in danger of evolving in a strange, unknown and undesirable direction. Advocates of cloning practices say that it may, among other things, serve society as an effective alternative treatment for infertility. The cloning of animals has stirred...
7 Pages(1750 words)Assignment

The Relationship Between Security, Risk and Health in a Large Organisation

Managers in modern organizations tend to use appropriately customized policies – in accordance with their firms’ needs and resources (employees, funds, technology) available. The current paper focuses on the examination of the various aspects of security, risk, health and safety within large organizations; Particular emphasis is paid on the fact that the demands of each one of these factors may be differentiated under the pressure of the market conditions and the organizational priorities. The case of Shell in Nigeria has been used as an example in order to show the potential co-existence and interaction of these factors within a specific organizational environment. The measures required and the role of the security ma...
9 Pages(2250 words)Coursework

Risk Management in the Airline Industry

With revenues in excess of ₤9 billion and a fleet of 245 aircraft as of March 2009, Heathrow-based BA’s risk management strategies provide an excellent example.
b) easyJet Plc, a Low-Cost Carrier, flying to more than 100 destinations in Europe, UK, and Northern Africa, and clocking over 50 million seats, with revenues of ₤2.4 billion in 2007-08 [2]. Covering over 380 routes with a fleet of 165 aircraft as of September 2008, Luton-based easyJet’s risk management strategies provide another excellent example with a different set of policies.

The airline industry, internationally, is characterized by its exposure to substantial operational and financial risks. Financial risks result in uncertainly in key pa...
6 Pages(1500 words)Case Study

The Issue of Business Risk

The new approach was based on assessing the risk in business as well as process level risk while performing the audit and as such, the fundamental process of performing audit took a new turn to accommodate the changes that are perceived to take place in the 21st century.

There are many studies including Humphrey, Jones, and Khalifa that assess the impact of this approach on the actual audit engagements and as such discussed at length as to what is being done and what is required further to make this practice more effective to cater to the needs of the modern business practices. Further studies also indicated the overall effectiveness with which this new methodology has been implemented by the audit firms while conductin...
6 Pages(1500 words)Literature review

Risk Management

Financial risk is the risk of getting losses because of market changes or the operations of competitors in the market (Das, 2006 ) On the other hand, operational risk refers to those risks of losses due to non-financial business inputs, outputs, and operations. Operational risk can be further classified into pure and speculative risks. Pure risks are those that on occurrence lead to loss and if they do not occur, they would not lead to any profits either. Speculative risks are those kinds of risks whereby on occurrence they lead to a loss but when they do not occur, they lead to profits (Das, 2006). These two kinds of risks occur on a daily basis in any market situation and each business unit needs preparation for them.
7 Pages(1750 words)Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Risk-Return Concepts for FREE!

Contact Us