RISK AND RETURN

Risk and Return

Risk and Return

Introduction

This paper intends to discuss the Risk and return from the investment made in the stocks. The major focus of this paper is on the stock price analysis and volatility of Tesco Plc. Further, capital asset pricing model is analyzed, which is used to determine the riskiness of the stock price against the stock exchange The volatility and beta of the share price assists the investors in making investment decisions for short run as well as long run.

Discussion

Stock Market has a set of rules and mechanisms that allow to purchase and sale of securities in open market. This has been termed as main financial market segments which comprises of high risk but give investors a high return sometime supernormal return. The peculiarity of this market is the fact that, as a rule, all securities are freely traded in the market. An investor can fully or partially recover the money invested by selling securities. This opportunity is free to contract allows the investor to choose the object of investment and the time at which he wishes to invest his money (Uchida & Susai, 2011). The benefits enjoyed by the investors are as followed:

Profitability is high: investors when invest in the stock market can earn lot money in form of return taking in to the consideration of the rick which is associated with the returns. Mostly the investor expects that their invested money should get double in a short period of time and for that they invest in riskier shares which might in return give them huge amount. This usually not happen, before investing in the share, investors should know the proper knowledge regarding the market conditions and the condition of the company.

Relationship between Risk and Return

Risk is the probability of non-occurrence of the expected outcome. In greater volatility instrument, there is the greater probability that the expected outcome will not occur. Variability or volatility is measured, among other things, such as the beta (from CAPM) or standard deviation. Knowing the current risk and reward, one can assess how effective the investment activity is. However, in order to take the maximum yield with minimum risk, one's investment should be on the efficiency frontier (by Markowitz).

Optimal portfolio and the Markowitz efficient frontier

In short, the theory of Markowitz insists that the increase in earnings growth is accompanied by greater risk. Therefore, we need to clearly pick up the tools to your investment portfolio bringing justice, not reduced profits.

The positive relationship (ex-ante) between risk and expected return is considered one of the fundamental laws of finance. As expected, there are numerous studies that have empirically tested in the long term. Therefore, the greater the risk that we assume, the higher the yield that can be expected: in finance, there are no easy or free lunch meals to exploit. As shown by several studies of behavioral finance, this positive relationship between risk and return is not easily understood from simple savers, who in fact feel more "natural" a ...