M3 More Linkages.odt - More Linkages What are the linkages among financial decisions return risk and stock value Why are these linkages important How

M3 More Linkages.odt - More Linkages What are the linkages...

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More Linkages? What are the linkages among financial decisions, return, risk and stock value? Why are these linkages important? How does the financial manager incorporate these as s/he manages the assets and liabilities of the firm? Be sure to include examples to provide specificity for your answers.When making a financial decision, they are never risk free and therefore depend largely on the relationship between return, risk and stock value. A return describes the earnings that is secured on investments made for which one bears the risk of failure or potential loss. Therefore, the risk and returns have a negative relationship. If there is a high risk investment, then the return also tends to be higher, because the investor wants to be compensated for bearing the higher risk in the form of returns. The opposite would be when one seeks a low risk investment, then the return will be lower in relation. On the other hand, stock values and returns have a positive relationship. As the return increases, so will the market value of the stock. Even if there is no direct relationship, it does insinuate that investments with the greatest potential for returns also have the greatest risks. These relationships are particularly important for an investor, as he will have two main concerns; the first would be the rate of returns and the second are the risks involved. With stocks, the returns are essentially boundless as they might become worthless or have the potential to grow to a much larger value over time than the original purchase price. Purchasing stocks also have a higher risk than bonds because the return on stocks are undetermined in contrast to bonds. Therefore it would be correct to imply that these relationships are part in the investment process.Any sensible financial manager or investor tends to avoid higher risks without the promise for a higher return. A financial manager takes these relationships into account on a daily basiswhen administering assets and liabilities of a corporation. Whether or not it is worth risking an investment that might be profitable can be determined on the basis of this linkage. A

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