What is risk/return trade off?

What is risk/return trade off?

Definition: Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off.

Which decisions of the firm are guided by risk/return trade off?

Higher the risk of an action, higher will be the risk premium leading to higher required return on that action. A proper balance between return and risk should be maintained to maximize the market value of a firms share. Such balance is called risk-return trade off and every financial decision involves this trade off.

What is the role of return and risk in financial decisions?

Risk and Return Considerations. Risk, along with the return, is a major consideration in capital budgeting decisions. The firm must compare the expected return from a given investment with the risk associated with it. Higher levels of return are required to compensate for increased levels of risk.

How do you identify risk/return trade offs?

To determine the risk-return tradeoff of a specific mutual fund, investors analyze the investment’s alpha, beta, standard deviation, and Sharpe ratio. Each of these metrics is typically made available by the mutual fund company offering the investment.

What is risk/return relationship?

The risk-return tradeoff states the higher the risk, the higher the reward—and vice versa. Using this principle, low levels of uncertainty (risk) are associated with low potential returns and high levels of uncertainty with high potential returns.

What is the relationship between risk and return?

Why is it a bad idea in investing in just one investment?

Cons include more difficulty diversifying your portfolio, a potential need for more time invested in your portfolio, and a greater responsibility to avoid emotional buying and selling as the market fluctuates.

What is the relationship between risk and return in finance?

What is the risk/return relationship?

The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns.

What are the three most important financial decisions?

There are three decisions that financial managers have to take:

• Investment Decision.
• Financing Decision and.
• Dividend Decision.

What are the three broad areas of financial decision making?

There are three broad areas of financial decision making – capital budgeting, capital structure and working capital management.

What is the trade off between risk and return?

Risk-Return Tradeoff is the relationship between the risk of investing in a financial market instrument vis-à-vis the expected or potential return from the same.

What is the balance between risk and return?

Such balance is called risk-return trade off and every financial decision involves this trade off. The financial manager in order to maximize shareholders wealth should strive to maximize returns in relation to the given risk. He should seek courses of actions that avoid unnecessary risks.

Which is greater the risk or the expected return?

The greater the risk, the greater the expected return. Financial decisions of a firm are guided by the risk-return trade off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of the firm.

How are risk return and risk free rates related?

Financial decisions of a firm are guided by the risk-return trade off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of the firm. The relationship between return and risk can be simply expressed as: Risk free rate is a rate obtainable from a default risk free government security.

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