Question

what are factors of Risk and Return.

Answer 1

The factors affecting risk and return are :

• The asset mix in the portfolio : If the portfolio is consisting of higher allocation to equity then the return and risk in the portfolio is high in comparison to debt where the risk is low and the return associated with it is also low. Debt provides a fixed income stream, whereas equity can provide unlimited returns and the risk is also very high attached to it.
• The condition of the overall economy : If the economy and the GDP growth rate is low and the growth rate in the economy is low then the return of our portfolio is low and the risk of capital loss is high. As the economy approaches recession, the employment rates are low and the profits of the industries is low. As the economy grows, the profits of the industries rises and so the risk of the portfolio falls and the returns it generates increases.
• The operational and financial performance of industries : The companies who constantly deliver higher profits and are successful in cost reduction and deliver a higher net profit, also reward the investors in the form of higher share prices and the risk involved in investing in such companies is low. Whereas, companies which have higher levels of debt are riskier and also lead to bankruptcy which can completely destroy shareholder wealth and so the return is low and the risk is high when invested in such companies.
• The government polices and the political scenario : If the government implements polices which favor the industries we are invested in then the risk is low and the return is high.If the policies are against , then the stockholder wealth may be destroyed while remaining invested in such companies.