The risk return relationship is a business concept referring to the risk involved in exchange for the amount of return gained on an investment. These two factors are directly proportional to each other, meaning the more return sought, the higher the risk that is undertaken.
The equilibrium risk-return relationship describes the investment/saving decision of a person based on risk versus return. Generally, a rational person maximises their outcome such that the last unit cost of a little more risk is equal to the incremental return on an investment. Since the cost of risk is an expectation due to uncertainty, different individuals value risk at different levels. A risk-adverse individual will choose a lower equilibrium value of investment/saving because their expected incremental costs from risk are higher than a less risk-adverse person.
mostv risk most profit
The risk of a government bond is minimal, though the return from the government bond is very low compared to other lucrative bonds available in the market.When you opt for more return, there is more risk. Whereas though in government bond, the return is low, your investment is well secured and risk ratio is almost nil.
A negative market return means that there has been a loss on investments because stocks have gone down. CAPM is a model that describes the relationship between risk and expected return and could be used to try to foresee negative market returns.
The total risk of a single asset is measured by the standard deviation of return on asset. Standard deviation is the square root of variance. To measure variance, you must have some distribution/ possibility of asset returns. However, the relevant risk of a single asset is the systematic risk, not the total risk. Systematic risk is the risk that cannot be diversified away in a portfolio. Systematic risk of an asset is measured by the Beta. Beta can be found using Regression (between market return and asset's return) or Covariance formula.
risk is pre-stage for return...
the security market line
When it comes to investing, one general relationship between risk and reward is that taking more risk is associated with a greater return. However, in many cases there is no relationship between the two. For example, even though stocks tend to have a higher return than bonds, taking that risk does not guarantee a better return.
the security market line
return is a reward gained from investing or the reward from employing assets in a company. risk is the degree of uncertainty of possible return generated from an investment
The equilibrium risk-return relationship describes the investment/saving decision of a person based on risk versus return. Generally, a rational person maximises their outcome such that the last unit cost of a little more risk is equal to the incremental return on an investment. Since the cost of risk is an expectation due to uncertainty, different individuals value risk at different levels. A risk-adverse individual will choose a lower equilibrium value of investment/saving because their expected incremental costs from risk are higher than a less risk-adverse person.
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CML a special case of SML. While CML represents Return potential and risk involved in all financial asset across the Capital market, SML is the linear relationship between the expected return of security and its systematic risk, the expected return comparing a risk-free return plus a risk premium.
The risk-return relationship for each financial asset is shown on
Risk free rate of return or risk free return is calculated as the return on government securities of the same maturity.
The higher the risk, the higher the return.
there is a direct relationship between financial decision making and risk and return. each financial decision made by the financial manager will have implication for the overall risk of the firm and its potential returns. All financial decisions are ultimately subjective in nature regardless of the amount of objective information collected as part of the decision making process. as a result, not all financial managers view risk return trade offs similarly. however it is expected they such decision making will be consistent with the goal of the investors that the financial manager represents. good luck......