Bus 401 - Risk and Return

Risk and Return

Valerie Harris

BUS401

Stephen Rock

September 13, 2013

Risk and Return

          When a person is investing in a project or stocks and bonds, there is always a risk of not receiving back what you put into the investment. There is much uncertainty in the world, and business carries its own uncertainties.

     There are no guarantees when investing, so there is no situation where you can have a return without some type of risk. Although the CAPM considers Treasury bills to be risk-free, because the government has always paid its debt, they are still not completely risk-free. There is the risk of inflation, if the return is below inflation you lose purchasing power. (Finance for Nerds, 2009) You also need to be concerned about the currency risk for foreign investments because of the foreign exchange rates.

     Taking a large risk does not guarantee a large return because there are variables in play that can change the outcome of the investment. “We know that risk-averse investors require a higher expected return if they anticipate being exposed to more risk or variability” (Hickman, Byrd, McPherson, 2013). A large risk expects a higher return, but it is possible that the higher risks will cause the investment to lose money instead.

     In deciding to pursue my education, I am taking a risk by borrowing so much money to finance my decision. I am risking the possibility that I may not finish with a degree. There are many opportunity costs that I am losing because of the money and time spent on a future completion date that quite possibly could be a major waste of effort. I could be using the time for something that I can see the results of now, instead of waiting to see the results in years to come.

References

     Hickman, J., Byrd, J., McPherson, M. (2013). Principles of finance. San Diego, Ca.

          Bridgepoint Education Inc.

     http://finance4nerds.com/89/investing/what-is-a-risk-free-investment-anyway/