Question

What is meant by an investor’s required rate of return? How do we measure risk in an investment? What do you consider a “risky” investment and a “safe” investment? What do you consider the tradeoff between risk and return of investments? Why are these concepts important to business leaders in Saudi Arabia? what are the risk versus return and doing business in Saudi ?Arabia.

Answer 1

Investor's required return is the minimum annual return that is necessary for investing into a particular security. It is used in evaluation of Investments. It takes into consideration of Market return, Risk free Return and the volatility of the stock.

Risk can be measured with the help of Beta. Beta measures an individual investment's volatility in relation to the stock market in general. The higher the Beta, the higher the required rate of return and vice versa.

Risky investment is an investment with a return that is not guaranteed. If a Beta of a stock is higher, it can also be said that the volatility of a stock is high and is a risky investment. On the other hand, a safe investment is one that yields a stable return and it's rik is low.

The Risk/ return trade off indicates that higher risk levels are associated with the possibility of higher returns/potential losses but is not guaranteed.Lowlevels of uncertainty or risk are associated with low potential returns.

These concepts are important in Saudi Arabia as they encourage risk sharing with returns. It is closer to profit sharing than the payment of a fixed, regular and pre-agreed amount.

Higher returns are expected for assets with higher level of risk and vice versa.