Downloaded 205 times
Uploaded byNaga Jyothi
Risk Return Trade Off
Risk involves uncertainty about potential future problems or losses. It describes the variability in returns around an expected average outcome. There are several types of risk, including market risk from macroeconomic factors, purchasing power risk from inflation, interest rate risk for bond prices, and business risks from uncertainties like changes in tastes, competition or policies. Financial risk specifically refers to the possibility of sudden monetary losses related to financing.
More Related Content
Similar to Risk Return Trade Off
Risk Return Trade Off
- 2. A risk isa potential problem – it might happen or it might not. Risk involves uncertainty. It may happen or it may not.. “ The variability of return around the expected average is thus a quantitative description of risk.” -Fischer & Jordan
- 3.
- 6. Market risk :-It is the fluctuation of returns caused by the macro economic factors that affect all risky assets. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters and terrorist attacks. Purchasing power risk:- Also known as inflation risk. It is the chance that the cash flows from an investment won't be worth as much in the future because of changes in purchasing power due to inflation. The purchasing power risk of holding cash rather than a physical asset like gold or real estate tends to increase when inflation is high Interest Risk:- Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. As interest rates rise, bond prices fall, and vice versa. It is the risk taken by bond investors, that interest rates will rise after they buy.
- 8. 1. Business risk:-The term business risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence etc Strategic risk:-It’s the risk that your company’s strategy becomes less effective and your company struggles to reach its goals as a result. It could be due to technological changes, a powerful new competitor entering the market, shifts in customer demand, spikes in the costs of raw materials, or any number of other large-scale changes. Compliance risk:- Are you complying with all the necessary laws and regulations that apply to your business? But laws change all the time, and there’s always a risk that you’ll face additional regulations in the future. And as your own business expands, you might find yourself needing to comply with new rules that didn’t apply to you before. Operational Risk:- refers to an unexpected failure in your company’s day-to-day operations.
- 9. Financial Risk:- thecategory of financial risk refers specifically to the money flowing in and out of your business, and the possibility of a sudden financial loss Reputational Risk :- One negative blog post or product review can spread online in a flash and change the direction of a company.” Other Risks:- They include risks from the environment, such as natural disasters, employee risk management, political and economic instability in countries you import from or export to.
- 11. 2. Financial risk:-Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent
- 12. While some investorswill settle for principal protection, most investors are in search of return, specifically alpha returns. It comprises any change in value and interest or dividends or other such cash flows which the investor receives from the investment. A loss instead of a profit is described as a negative return. RETURNS?? ROI:- It measures the gain or loss generated on an investment relative to the amount of money invested. ROA:- tells you what earnings were generated from invested capital (assets). ROE:- It is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders' equity.