Risk and Return Analysis_KEly - 1 Risk and Return Analysis...

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1 Risk and Return Analysis Risk and Return Analysis FIN/370 Kristin Ely September 5, 2016 Thomas Gruber
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2 Risk and Return Analysis Risk and Return Analysis The proverb “the bigger the risk the bigger the reward” is still around to this day. If one can play it safe by investing money in a savings account or buying Treasury bills then why would one invest their money in risky stocks and bonds? The answer lies within the return. Very low risk investments provide a very low return. Understanding risk and return can greatly benefit ones future investments. Risk and Return Relationship Before one dives into the world of investing one must first understand the relationship between risk and return. “Almost all investments carry risk and yield return. Usually, higher the risk higher the return, lower the risk lower the return. However, a general understanding of this phenomenon is not sufficient to make appropriate decisions relating to investments. A more quantifiable analysis is required to understand investments better. The quantifiable analysis is done by use of simple arithmetic and statistics to analyze the relationship.” (Financial Concepts, 2016) Some investments are riskier than others and comprehending the difference between such investments can lead to an extraordinary financial return or an extreme monetary loss. First, one must understand the risk-return tradeoff which “is the principal that potential return rises with an increased risk. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost (Investopedia, 2016)”. Second, one must break down their risk-return tradeoff. Taking some risk is the price of achieving returns, but one must
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