RISK AND RETURN

Financial risk refers to the threat that is associated with financing due to elements of loan that is linked to the default. Return is referred to either the gain or loss of security within a particular period of time. When an individual makes an investment risk they expect some return in the future from the investment (Shim & Siegel, 2008). The return expected is usually uncertain due to factors that surround the project. The variation from the expected and the actual return identifies the level of risk. Systematic risk affects the organization varying degrees as it affects social, economic and political systems. Unsystematic risk is affected by factors such as labor strikes, scarcity of raw material and inefficient management. This type of risk is unique as it varies from one organization to another. Returns from an investment are determined by the periodic cash flows referred as capital gains or loss.  Risk tolerance is important when creating an asset portfolio as it varies from one investor to another due to elements such as future earnings and the size of the portfolio (Shim & Siegel, 2008).

There is a relationship between risk and return of positive correlation. This is because less levels of risk are associated with minimal possible returns while higher intensity of risks are connected with high potential returns (Brigham & Ehrhardt, 2008). However, there is no guarantee that high risks will yield high returns. Eventually, a high risk may result in great loss of capital amount. It is correct to say that the positive correlation may indicate the connection between risk and return but due to the unsystematic risk and systematic risk higher risk investment may fail and result in greater losses (Brigham & Ehrhardt, 2008).

 

 

Reference

Brigham, E. F., & Ehrhardt, M. C. (2008). Financial management: Theory & practice. Mason, Ohio: Thomson Business and Economics.

Shim, J. K., & Siegel, J. G. (2008). Financial management. Hauppauge, N.Y: Barron's Educational Series.