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Risk-Return Trade-off

Risk-Return Trade-off. S.Vasantha. There is a fundamental link between an investment’s return and its risk. ‘Investment return’ is the amount of money your investment earns.

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Risk-Return Trade-off

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  1. Risk-Return Trade-off S.Vasantha

  2. There is a fundamental link between an investment’s return and its risk. • ‘Investment return’ is the amount of money your investment earns. • ‘Investment risk’ is the variability of returns and the chance that your investment will return less than you expect, or your investment makes a loss leaving you with less capital than when you started, or your investment doesn’t even keep up with inflation meaning it is worth less over time. • ‘Volatility’ is the relative rate at which the price of an investment moves up or down. • Generally, the higher the potential returns, the greater the risk. The smaller the potential risks, the lower the returns.

  3. Risk – return Trade off • Financial Decisions of the firms are guided by the Risk-return trade off. These Decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of the firm. The relationship between return and risk can be simply expressed as follows: • Restun = Risk free rate + Risk premium

  4. The chart shows an investment rule of thumb: that cash is the least risky, but gives the lowest return over time, whereas, shares are the most risky, but should give you a higher return over time

  5. Define financial management. Explain the objectives of financial management • Explain the concept of wealth in the context of wealth maximization objective • What are the major types of financial decisions that a business firm makes ? How do they involve risk- return trade off? • Explain point in favor of wealth maximization and profit maximization • Explain about agency problem in detail • What is meant by risk return trade off? • Explain the roles of finance manager • Explain the nature and scope of financial management?

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