1.

Finance theory predicts that higher risk is associated with higher return. Empirically however results are
mixed (it is positive in Bollerslev et al. (1988), Campbell and Hentschel (1992), Ghysels et al. (2005) but
negative in Campbell (1987), Breen et al. (1989), Pagan and Hong (1991), Glosten et al. (1993), Whitelaw
(1994), Lettau and Ludvigson (2003), Bradnt and Kang (2004)) . Because they depend on some sets of
conditioning variables, there is always a risk of misspecification.

The concept of risk and return analysis is integral to the process of investing and finance. All financial
decisions invlove some risk. You may expect to get a return of 15% per annum in your investment but
the risk of "not able to achieve 15% return" will always be there.

Return is simply a reward for investing as all investing involves some risk.
The greater the risk, the greater the return expected.

The objective of risk and return analysis is to maximize the return by creating a balance of risk. For
example, in case of working capital management, the less inventory you keep, the higher the expected
return as less of your money is locked as asset.; but you also have a increased risk of running out of raw
material when you actually need it for production or maintenance. Which means you loose sale. Thus all
companies tries very hard to maintain an minimum investory as possible without effecting smooth
production. This is a very commong expample of risk return trade-off

In case of an investment in shares/stocks, I as an investor accept to get a better return than fixed
deposits but I am also ready to take risk of loosing my money in stock market.

Hence important is to understand how much risk you can take and invest accordingly.

It was also emphasized that risk and return are two important determinants of the value of a share. So, a finance
manager as well as any investor, in general, has to consider the risk and return of each and every financial decision.

7.

the importance of the risk dimension in capital budgeting can hardly be over-stressed. In fact risk and return are
closely related. The investment project that is expected to provide a high return may be too risky that it causes a
significant increase in the perceived risk of the firm. This trade off between risk and return would have a bearing on
the investor perception of the firm before and after acceptance of a specific proposal.

6. 'Risk-Return Tradeoff'
The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated
with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns.
According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility
of being lost.
8. Investment Risk Pyramid
After deciding on how much risk is acceptable in your portfolio by acknowledging your time horizon and bankroll,
you can use the risk pyramid approach for balancing your assets.

This pyramid can be thought of as an asset allocation tool that investors can use to diversify their portfolio
investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has
three distinct tiers:

Base of the Pyramid The foundation of the pyramid represents the strongest portion, which
supports everything above it. This area should be comprised of investments that are low in risk
and have foreseeable returns. It is the largest area and composes the bulk of your assets.
Middle Portion This area should be made up of medium-risk investments that offer a stable
return while still allowing for capital appreciation. Although more risky than the assets creating
the base, these investments should still be relatively safe.
Summit Reserved specifically for high-risk investments, this is the smallest area of the
pyramid (portfolio) and should be made up of money you can lose without any serious
repercussions. Furthermore, money in the summit should be fairly disposable so that you don\'t
have to sell prematurely in instances where there are capital losses.

Personalizing the Pyramid

Not all investors are created equally. While others prefer less risk, some investors prefer even more risk than others
who have a larger net worth. This diversity leads to the beauty of the investment pyramid. Those who want more
risk in their portfolios can increase the size of the summit by decreasing the other two sections, and those wanting
less risk can increase the size of the base. The pyramid representing your portfolio should be customized to your risk
preference.

It is important for investors to understand the idea of risk and how it applies to them. Making informed investment
decisions entails not only researching individual securities but also understanding your own finances and risk
profile. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns,
investors should have an idea of how much time and money they have to invest and the returns they are looking for
 3.

The relationship between risk and return is a fundamental financial relationship that affects
expected rates of return on every existing asset investment. The Risk-Return relationship is
characterized as being a "positive" or "direct" relationship meaning that if there are expectations
of higher levels of risk associated with a particular investment then greater returns are required
as compensation for that higher expected risk. Alternatively, if an investment has relatively
lower levels of expected risk then investors are satisfied with relatively lower returns.

This risk-return relationship holds for individual investors and business managers. Greater
degrees of risk must be compensated for with greater returns on investment. Since investment
returns reflects the degree of risk involved with the investment, investors need to be able to
determine how much of a return is appropriate for a given level of risk. This process is referred
to as "pricing the risk". In order to price the risk, we must first be able to measure the risk (or
quantify the risk) and then we must be able to decide an appropriate price for the risk we are
being asked to bear.

How to determine return n risk

Examples:
X Company is evaluating the rate of return on two of its Assets, I and II. The Asset was purchased a year ago for $
4,00,000 and since then it has generated cash inflows of $ 16,000. Presently, it can be sold for a price of $ 4,30,000
Asset II was purchased a few years ago and its market price in the beginning and at the end of the year was $ 2,40,000
and $ 2,36,000 respectively. The Asset II has generated cash inflows of $ 34,000. Find out the rate of return on these
Assets.

Solution

The rate of return on these assets can be ascertained as follows:

k = (P1 - P0 + D1 ) / P0

Where,

P1 = Price of asset in the end of year

P0 = Price of asset in the beginning of year

D1 = Cash inflow for the year

For Asset I, k = 11.5%

For Assets II, k = 12.5%

In this example, the rate of return of Asset II in higher at 12.5% though its capital value has reduced from $ 2,40,000
to $ 2,36,000 over the period. The reason for higher rate of return is the relatively higher cash inflows of $ 34,000
form the Asset II during the year. So, it is the combined effect of the change in value and the cash inflows that make
up the rate of return on any asset.

Thus, the return from an investment during a given period is equal to the change in value of the investment plus any
income received form the investment. It is important therefore, that any capital or revenue income from the investment
to the investor must be included, otherwise the measure of return will be deficient. The return form investment cannot
be forecasted with certainty as there is risk that the cash inflows from project may not be as expected. The greater
the variability between the estimated and actual return the more risky the project.

2. The risk/return relationship is a fundamental concept in not only financial

analysis, but in every aspect of life. If decisions are to lead to benefit
maximization, it is necessary that individuals/institutions consider the combined
influence on expected (future) return or benefit as well as on risk/cost. The
requirement that expected return/benefit be commensurate with risk/cost is
known as the "risk/return trade-off" in finance.

Reference: http://seminarprojects.com/Thread-risk-return-analysis-in-equities-
with-reference-to-nse-sensex-companies#ixzz2O6GLUvqK