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In: Finance

Investing includes risk, return, portfolio construction, asset allocation, and the evaluation of the portfolio. Discuss return...

Investing includes risk, return, portfolio construction, asset allocation, and the evaluation of the portfolio.

Discuss return as it is related to risk. What is return, component parts of return, historical returns, and the relationship of returns, and considerations in evaluating return?

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Expert Solution

Return is percentage or amount of appreciation in the investment and it also has a positive correlation with with risk. A higher rate of return requires a higher rate of risk and lower risks means lower return .So, it is dependent on the capability of an individual to take risks exposes him to the possibility of rate of return.

There are three components of returns and they are time value of money,Expected rate of inflation and the overall risks involved.

Historical returns are returns of the past of an investment and it is used for finding out with a trend analysis of past returns and drawing an inference to be used in future analysis.The relation of risk to return is positive correlation .

The consideration in evaluating returns will always be risk exposures like political risks, economic risks etc. Historic trends, Credit analysis, solvency of the firm, Dependency on external factors, Level of control etc.

jeff jeffy answered 2 years ago
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