Question

Discuss the basics of risk return analysis in the financial context and the statistical tools we use to analyze risk and return.

Answer 1

Risk return analysis focuses on that there should be an appropriate return for an amount of risk so people will be motivated to take risk in order to make higher return.

It is always said that 'higher the risk , higher the return' so an investor who loves risk would like to take more risk in order to maximize the overall return whereas a risk averse investor would like to avoid risk in order to protect his return so risk exposure must be ascertained in the field of investment in order to gain the maximum out of the investment and it depends upon the nature of the investment philosophy.

Various type of statistical tool we need for analysing return and risk are risk adjusted weighted average cost of capital which will tell the risk taken in order to make certain return,as wellwell as the Capital Asset pricing model is also accounting for systematic risk as it is calculated after estimation of Beta.