Question

1. The relationship between Risk versus return is a core concept in Finance that describes investor behavior. Discuss the meaning of this concept and provide an example of how we can measure risk and return for equity type investments

Answer 1

Risk is defined asthe chance that an outcome or investments actual gains will differ from an expected outcome or return . Return is a profit on an investment . The risk -return trade off states the higher the risk ,the higher the reward and vice versa . The concept of financial risk and return is an important aspect of financial managers core responsibilities within a busimess .The more financial risk a business is exposed to the grater its chancesfor a more significant financial return . For the majority of stocks bonds and mutual funds investors know accepting a higher degree of risk or volatility results in a greater potential for higher returns .To determine the risk return tradeoff a specific mutual fund investors analyze the investment alpha betastandard deviation and sharp ratio .Measuring risk and return in an equity fund using alpha and beta . Alpha is a financial risk ratio which can be used to predict returns from holding an investment . Put differentilybeta shows how violate an investment is compared to the market .Beta exposureis measured relative to a benchmark indexlike S&P 500.