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Essay / Research Paper Abstract
This 8 page paper answers questions regarding risk and return explaining basic concepts of stock market investments including the concept of risk in return, the definition and usefulness of the beta, the concept of diversification, the use of the Security Market Line (SML) and the way the probabilities can be used when assessing potential portfolios. The bibliography cites 3 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEinvrisk1.rtf
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Unformatted sample text from the term paper:
the relationship between risk and return we can look at the way an investor may make an investment decision. If there are two investments which will provide the same potential
return, but one has a higher level of risk associated with it than the other, then the investor is likely to choose the investment with the lowest risk. There is
no incentive for them to choose to take the risky investment. However, if the investor was offered a potentially greater rate of return it is possible that the potentially greater
return may compensate for the greater risk. This is known as the risk premium. Therefore, theoretically, if an investor has to choose between a safer and a riskier investment they
would expect the riskier investment to provide a potentially greater return than a safer investment as compensation to the risk that they are taking. Question 2 When investors consider
witchdoctor may invest in they will want to collect information about the company and the way the share has performed in the past. Past performance will not be any guarantee
future performance, but many investors fear that it is an indication of the way the company performs on how the market perceived the potential of the company. In addition to
the financial performance measured by ratios such as profit margins, the investors will also want to look at the potential to make a profit buying and selling shares. A measure
which is used to indicate the volatility of the share price is the beta. The beta is generally perceived as a measure indicating risk, but the real measurement is that
of volatility (Howells and Bain, 2003). However, it may be argued that risky shares to be more volatile. Volatility is the level of change in the share price rising and
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