Assignment Number: U05A1
Within the financial management realm, whether investing or financing, the principles of risk-return relationship are often applied during decision making. Therefore, it is imperative to understand the financial definition of risks and returns and how these two concepts are directly linked to investment decision making and other financial choices businesses make. In financial terms, risk is defined as the uncertainty associated with any investment rather than the possibility of loss (Sherman, 2011). It is the possibility that the actual return on an investment will be different from its expected return. There are four different types of risks- default, inflation, maturity, and liquidity. For example, a U.S. Treasury Security is a zero-risk investment but has a low rate of return. On the contrary, a start-up stock in a stock market has the potential of high return for its investor, but also carries the potential to lose the entire investment. It is the risk factor that investors are willing to take while making such risk-return financial choices. To the extent of risk can be measured, it is generally calculated as the standard deviation on an investment’s average return.
While risk is the uncertainty linked with any investment, return is a profit on an investment in a particular period. Generally, a return is the income and the capital gain on an investment usually calculated in percentage. Some of the commonly used types of returns are return on investment (ROI), return on equity (ROE), and return on assets (ROA) (Investopedia, 2017). In order to better gauge the risk-return relationship and by carefully assessing the true riskiness to an investment, an investor is able to apply validity to an estimated or definitively required rate of return, enabling the investor to analyze whether the investment is attractive or not. All financial decisions should include an analysis of such risk and return as a platform for assessing the real value of money or whatever the element of investment is. The time value of money is an important method to understand the possibility of risk or return in any investment. By understanding the future value of money, present value of money, the term for which the money will be invested, and the rate of return offered by an investment, an investor can better predict the risk or return as the investment outcome.
The Rights and Advantages belonging to Shareholders:
A shareholder is any person or individual, company, or institution that owns or has purchased at least one share of a company’s stock. They hold ownership in the company through their stock purchase and reap the benefits of the company’s success in the form of increased stock valuation. However, if the company’s stock prices decline, the shareholders can lose part or all of their invested money. Unlike other forms of businesses such as sole proprietorship and partnerships, the shareholders are not personally responsible for the company’s debts or other financial obligations. If the company goes bankrupt, the creditors cannot seek payment from the company’s shareholders. When shareholders buy stocks from a company, they enjoy certain rights that comes with their ownership. In partnerships, the business owners manage day to day business activities. On the contrary, shareholders- the actual owners of the company- reply on board of directors and other executives to run business within the company. The shareholders are also protected from individual accountability from the dues and duties of the c