Portfolio Management Fin 550
Portfolio Management
Strayer University
1.Analyze the relationship between risk and rate of return, and suggest how you would formulate a portfolio that will minimize risk and maximize rate of return. The relationship between risk and rate of return is risk determines expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a "positive" or "direct" relationship. (Importance of risk relationship , 2001). In other worlds if the risk of investing on an investment is high then the return will also be high.. Alternatively, if an investment has relatively lower levels of expected risk then the investor will get relatively lower returns. The risk and rate of return relationship effects both business managers and individual investors. The higher the chance of risk the more likely it must be compensated with higher return.
“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.”(Importance of risk relationship, 2001). In other words the risk for investment returns needs to be determined before the investment is carried out so that the investor knows what level of risk they are at. This process is called “pricing the risk". The price of risk is defined as the measure of risk quantified to determine how much risk is appropriate to bear for the investment. (Importance of risk relationship, 2001).
When formulating a portfolio with minimal risk and maximum return, one must quantify the degree of risk they are willing to take towards the investment. One must also pick an investment that does not have much risk involved. For instance if they choose to invest in a rental property then the chances of risk are not as high as opposed to if the person invested in a restaurant. If the restaurant becomes a flop and has to shut down the
Strayer University
1.Analyze the relationship between risk and rate of return, and suggest how you would formulate a portfolio that will minimize risk and maximize rate of return. The relationship between risk and rate of return is risk determines expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a "positive" or "direct" relationship. (Importance of risk relationship , 2001). In other worlds if the risk of investing on an investment is high then the return will also be high.. Alternatively, if an investment has relatively lower levels of expected risk then the investor will get relatively lower returns. The risk and rate of return relationship effects both business managers and individual investors. The higher the chance of risk the more likely it must be compensated with higher return.
“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.”(Importance of risk relationship, 2001). In other words the risk for investment returns needs to be determined before the investment is carried out so that the investor knows what level of risk they are at. This process is called “pricing the risk". The price of risk is defined as the measure of risk quantified to determine how much risk is appropriate to bear for the investment. (Importance of risk relationship, 2001).
When formulating a portfolio with minimal risk and maximum return, one must quantify the degree of risk they are willing to take towards the investment. One must also pick an investment that does not have much risk involved. For instance if they choose to invest in a rental property then the chances of risk are not as high as opposed to if the person invested in a restaurant. If the restaurant becomes a flop and has to shut down the
References: Reilly &Brown (2012) Portfolio management and investment analysis cengage learning Mason, OH. Importance of Risk and return relationship (2001) retrieved on April 29, 2012 from http://uwf.edu/rconstand/5994content2003/T1-Overview/T1-OverviewP04.htm Conerly B. (2012) International economic forecast 2012-2013 retrieved on April 29, 2012 from http://www.forbes.com/sites/billconerly/2012/04/24/international-economic-forecast-2012-2013/2/ Lei H. ( 2012) The budget and economic outlook : Fiscal years 2012 to 2022 retrieved on April 29, 2012 from http://www.cbo.gov/publication/42905