�0��qΩ�>mZ�lL������'8�x(\�$أ|[���2��q����=�p3RU�0g���5Ă���⒪r(L�d�ږ%�S�Q!ϙ�y�ƺ����R�h��g~YTd�Èu�p�b�>t�w˯����[�p�� �T�A���Ƹ�[����Nx�U�-Ox��re����۳�t2K(������:`y��a�~DU������!�B(UJB�2��B�{���|�}!և>bP����� N#^��/�6�#�w�|��Χs.B~zR=���\���F1�i�b�RK6��2�p�ö��7� Z��Yć&S��q�|ב��� u�۰�[��+��o��1O)^A5BU S�V~e�a����pChR-���i@cMZ'U�WF�l�(��h���c ��1B�[T��X/VսX��y�'����^ܚ�2�w�����e����k�g�V!~i���������mu*i ?�k�/��A�m�T�9���h�~�� ��.��,N�si}��x�t�or2]�3��ו��_N]�8mui�t��qJ �6�j��e�X��'N�4�1 Jy��Z%iݩ�N�J6�:��&����5�����S�l���^mW?������u/s�����I�\��o�֣)|�L�0�{8,�s8Zя��wKc�]B�p��-`lE��5�RH����^/�s����bC�,�^H��z�q��g�OcX.m�bY���#�v�p���}# �A1���~� �J/�� �]�p�[���!�IaG����$N���ő$����Y��\�$���6|��.� ������~��m 3Y;�ڨW��yÜV�w��nzOn.�ˈ�ntk���=���� H��wT� ��-^`���%��}������-F��a��c뉛��Fږ�1���Լ�ō;�v��Q�/�o��6�cnw�O�e�֮��}�����;���*�*�jK��!L��X�} ���մX!~��\�|ůhrϯh��S��Cl��д�~��G� �? %%EOF Increased potential returns on investment usually go hand-in-hand with increased risk. Anytime there is a possibility of loss (risk), there should also be an opportunity for profit. In investing, risk and return are highly correlated. However, they are anticipated returns that might never materialize. 0000003844 00000 n Elements of Risk: 0000008412 00000 n (�t�9B�@�����c4//�w�:�(kF- -�j`g�0�3�(Xpq0*l?P������C�B7�e���V++�� 0000005350 00000 n 596 0 obj <>/Filter/FlateDecode/ID[<2008FB9D024B8240B271684D7D57B95C><9932575F7F6DF44CACCD401F1FFA3AEF>]/Index[574 52]/Info 573 0 R/Length 96/Prev 131386/Root 575 0 R/Size 626/Type/XRef/W[1 2 1]>>stream �YW�K�S��(���8���{�l3�4~�.�uu_����7���b3ݼ��>��f����~��x� ���f�� ==�6g�;|`�����rPl��=f�����q�D�ˢ�y�9ͮf��5���r�9?_�=�.V �����|:{y3x�Y�ޖY�Y� �C`��ɼ�����*k�]�`�*6w����j>����� �\o&�����aV� 6��bT6|y*\U�w5}�,W�g? Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. 0000008244 00000 n {{��c( a!RI$Q�N�����#i�]�*���C.�vtKJ��gz�UD�D�‘���������u�u�?|��ݓ7k}��b�B���y�ɀO��~ G� We close the chapter by restating the main theme of this book, which is that financial theorists and practitioners have chosen to take too narrow a view of risk, in Valuation Part 2. 1.2 Conditional Risk Measures Our emphasis on conditional risk … $���< ��$�JA& b/���X� �)�`1q�AHG$HBD V�Q ��u������,���8��� ��| tended discussion of the topic. 0000005574 00000 n Risk and Return: A New Look Burton G. Malkiel One of the best-documented propositions in the field of finance is that, on average, investors have received higher rates of return on investment securities for bearing greater risk. 0000001140 00000 n ($ Values in millions) Property (LR=1) Levered Equity (LR=2.5) Debt (LR=0) 0000001565 00000 n The risk of the project is the chance that these returns do not materialize, so that the project destroys value for its owners. h��[o�6ǿ a. H��V�R�F��+z)����Qv?�W0�/l/d!@�"�$p��#�9�.8.�RŌF��3�O��mƩ����.hc+^V��6�@}��p2�L����`��{NLX�D�_�ۛ�g�V3VV??2^��2]=qą!%e)I�HX���͞o�a��*5! A large body of literature has developed in an attempt to answer these questions. 0000010575 00000 n Risk & return analysis mishrakartik244. B�Tؗ��/�MP>�0���i���D����}/�B �vi?��o�400%?�2���_T�*@� (�de The fact that investors do not hold a single security which they consider most profitable is enough to say that they are not only interested in the maximization of return, but also minimization of risk. 0000000676 00000 n Risk and Rates of Return - 1 RISK AND RATES OF RETURN (Chapter 8) • Defining and Measuring Risk—in finance we define risk as the chance that something other than what is expected occurs—that is, variability of returns; risk can be considered “good”— E�9��a��Qq^�����ϥS�[�������˛�SV6���y��PNz�f��e��@[��V�ʶ�v��H�|̴�w��]d�4:f����PG��gmPiDX BC�)L�OOG(u/��ɕx?�=��;h�����T�v�!���l��}1�JQ�\�8����]�y%;ِ�+� c�Uw��`�謦��!y��f5�+��*�fx���T��;��l���u�!���� ᩑb\�Fu�&�-}�h,�wEc� o�JɄU��� Income Return 8% 8% 8% Apprec.Return 2% 5% 0% Total Return 10% 13% 8% Exhibit 13-3: Sensitivity Analysis of Effect of Leverage on Risk in Equity Return Components, as Measured by Percentage Range in Possible Return Outcomes. endstream endobj startxref Describe how risk aversion affects a stock's required rate of return. %PDF-1.4 %���� 0000004380 00000 n 0 Lesson 4 tharindu2009. 15.401 Lecture 7: Intro to risk and return _Asset returns _Measuring risk _Investor preferences _Estimating risk and return _Historic asset returns and risks Readings: _Brealy, Myers and Allen, Chapter 8.1 _Bodie, Kane and Markus, Chapters 5.2 ‒ 5.4 5 Key concepts TexPoint fonts used in EMF. 0000004610 00000 n – Depending on the degree of efficiency of the market, security prices may or may not fully reflect all information. %PDF-1.5 %���� 574 0 obj <> endobj Risk refers to the variability of possible returns associated with a given investment. Measuring portfolio risk Urusha Hada. Therefore, they have seen the Chapter 2 material previously. Chapter 7 - Risk and Rates of Return TRUE/FALSE 1. Different types of risks include project-specific risk, industry-specific risk, competitive risk, international risk, and market risk. The covariance of the returns on the two securities, A and B, is -0.0005. PDF | In investment, particularly in the portfolio management, the risk and returns are two crucial measures in making investment decisions. 625 0 obj <>stream 0000002040 00000 n The corresponding indifference curve in the expected return- Principles Used in This Chapter • Principle 2: There is a Risk-Return Tradeoff. %%EOF – We will expect to receive higher returns for assuming more risk. 0000001224 00000 n 5-2 a. average annual return = 10.91% and standard deviation = 22.72% endstream endobj 578 0 obj <>stream 0000000016 00000 n ���� 0000002076 00000 n The expected return on the market portfolio equals 12%. Investor attitude towards risk
Risk aversion – assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities.
Risk premium – the difference between the return on a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities.
The risk in holding security-deviation of return- deviation of dividend and capital appreciation from the expected return may arise due to internal and external forces. trailer h�b```���:|�cc`a��p����ǧ���`�Q21b[-ө Risk, along with the return, is a major consideration in capital budgeting decisions. So, when realizations correspond to expectations exactly, there would be no risk. xref Risk and Return Problems and Solutions is set of questions and answers for risk and expected return and its associated cash flows. What is the correlation between the returns of A and B? Risk and Return Considerations. CHAPTER 6: RISK AVERSION AND CAPITAL ALLOCATION TO RISKY ASSETS 0) 6-3 ) 5 4) 3) 0) 8. startxref ANS: A. endstream endobj 115 0 obj<> endobj 116 0 obj<> endobj 117 0 obj<>/ColorSpace<>/Font<>/ProcSet[/PDF/Text/ImageC]/ExtGState<>>> endobj 118 0 obj<> endobj 119 0 obj[/ICCBased 127 0 R] endobj 120 0 obj<> endobj 121 0 obj<> endobj 122 0 obj<>stream 0000002375 00000 n In this chapter, we begin our exploration of risk by noting its presence through history and then look at how best to define what we mean by risk. �m��f�dT���5WoDN����8Em~����4>ߧ���L:::E@$�z�b� 114 19 0000002298 00000 n endstream endobj 579 0 obj <>stream "��[[�D ̷�8�E��0��M��SV��[�1?,t)��桨J�����L�aX�s�x�EirN'm=�`q�ZO'c��|�|�्�t|��iWp\Æ�*/�`Y���3�.���D���˳���}���f�� �V.,$+��*gIT��x���V��=���:{~|��� �oc:9�T�DHi#t �}F�!�������e��}ޭ"���%�ŵc*�GRR �K���vރӰ�%̘��иh�.�S�|r �q�#�����(|B�1B>�`��q���pv����g$��e�. CHAPTER 2—RISK AND RETURN: PART I Cengage Learning Testing, Powered by Cognero Page 1 1. A two-stage due diligence procedure is shown to yield the risk-consistent and return-efficient investment opportunities. A framework is provided to estimate the risk of investment loss and the maximum potential investment loss. True b. The coefficient of risk aversion for a risk neutral investor is zero. Risk And Return Ashish Khera. View Risk and Return.pdf from FINM 1415 at The University of Queensland. Growers must decide between different alternatives with various levels of risk. Risk-return tradeoff is a fundamental trading principle describing the inverse relationship between investment risk and investment return. 114 0 obj <> endobj risk, there would be no return to the ability to successfully manage it. 0000008673 00000 n CHAPTER 5: RISK AND RETURN -- THEORY 5-1 a: because it has the highest expected return and the lowest standard deviation. endstream endobj 575 0 obj <>/Metadata 83 0 R/Outlines 109 0 R/PageLayout/OneColumn/Pages 572 0 R/StructTreeRoot 118 0 R/Type/Catalog>> endobj 576 0 obj <>/Font<>>>/Rotate 0/StructParents 0/Type/Page>> endobj 577 0 obj <>stream CHAPTER 10 RISK AND RETURN: LESSONS FROM MARKET HISTORY Solutions to Questions and Problems 1. However, risk did not always have such a prominent place. We argue throughout the chapter that, for most nancial risk management purposes, the conditional perspective is distinctly more relevant for monitoring daily market risk. This includes both decisions by individuals (and financial institutions) to invest in financial assets, such as common stocks, bonds, and other securities, and decisions by a firm’s managers to invest in physical assets, such as new plants and equipment. The risk profile of a venture is determined. This MAG offers introductory advice on (a) the nature of financial risks, (b) the key components of a financial risk management system, and (c) the tools that can be used to Chapter 7 cpa 1986 Indrajeet Kamble. risk and challenge the status quo. The standard deviation of A's returns is 4% and the standard deviation of B's returns is 6%. H��UKO�@��W�q�����-!$��J[(W=T��)¦�#��wf��Ii%�r�f��|;;��V�r� xGM�w�fިn��n�Ѩ~�Y*���4VA i��M���h^K�N�)W�e�]��*o�u�����Q�x�+ �4���/�4�N���X�-$�ك#@f?cى?���q�9���J'D �(�W�� *.�e���j�5�@B��t�B�d�HE��PETc&��K��ҵ�^���Wsi� ��tcQ�e*�&�tv��ڐq%CQ���>�˷S����]~��z�_���;�����Ҽ$��BnY��`]r�Cc|6>�`V7rhw?�����,�8Q>��1i��J7W� �'Z��|ӣ��cZ������N��ȇ)�\�k��'��1Tm��I~��%N[0�ߘ�I��1�Bb��~��LDS����Z��U�f���.�F�m�]��`�F����n��#q/��H. • Principle 4: Market Prices Reflect Information. Risk, return and diversification 1. Prior to 1952 the risk element was usually either assumed away or … �VjK�4�T�'�"���u�Q�iP�Q�QW&��Jt_Y�4� �c� � FA K ��`��0�x@eAj% J��@dqFa�b($4�����4�'Qa�g8Ĵ�w���ә�/�-���,h�p^�s�V���a��K�f � ��L Ш�b���H3�2p�ay�? return. Discuss the difference between Would you like to get the full Thesis from Shodh ganga along with citation details? ���� The return of any asset is the increase in price, plus any dividends or cash flows, all divided by the initial price. �������5��f���$P�����t�x�m���-��s|.ADN�9)�M'�v���H�*���*j�OO3�]z���h? The firm must compare the expected return from a given investment with the risk associated with it. Therefore, the corresponding utility is equal to the portfolio’s expected return. For each decision there is a risk-return trade-off. Chapter 2 Risk and Return ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS Our students have had an introductory finance course, and many have also taken a course on investments and/or capital markets. 0 Chapter 6 Risk, Return, and the Capital Asset Pricing Model ANSWERS TO END-OF-CHAPTER QUESTIONS 6-1 a. Stand-alone risk is only a part of total risk and pertains to the risk an investor takes by holding only one asset. S��Ѹ�Q���cG��)���#����f\L���H��M��4�-dq� MIT SLOAN SCHOOL OF MANAGEMENT 15.414 Class 9 Road map Part 1. Risk and return Part 3. Financing and payout decisions 3. RISK AND RETURN This chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. Risk is the variability in the expected return from a project. This chapter looks at the historical evidence regarding risk and return, explains the fundamentals of port- False ANSWER: False POINTS: 1 Risk & Return Analysis [pic] [pic] Ethan Cromartie Risk & Return Analysis BUS 505 Corporate Finance Certificate of Authorship: I certify that I am the author of this paper and that nay assistance received in its preparation is fully acknowledged and disclosed in the paper. Problems *NOTE: When working the following problems, you can always assume that treasury bills are risk free. H�\�Mj�0��:�,�E�-7�Ɛ81x��� �4N �,de��W҄*���'�fx՜=8��v�-:��,���J�^�Rj��N�cg��v����'V�?�8;��ꠦ�� 0000001357 00000 n The trade-off between risk and return is a key element of effective financial decision making. c. The market risk premium is defined as beta multiplied by the expected return on the market minus the risk-free rate a of return d. None of the above. Company X has a beta of 1.45. P1. The return of this stock is: R = [($86 – 75) + 1.20] / $75 R = .1627, or 16.27% 2. h�bbd``b`� Correlation = -0.0005 / ((0.04)(0.06)) = -0.2083 2. In this way, risk management is linked closely with achieving the organization’s objectives, and involves the management of upside as well as downside risks. �-T�]�$s��u͈V���'`��l��)ew��p�*���:�=tt(�8Ie�L��S��ж�[�b=xde���w�I��5Nh��Hy���e���b5u��bM>�O��d�R�+���۠�l��l�d{ܸ|��g��4>_MW����dE�7���e�kp��5_=ð�~����������\��',��w����ٲ�+�2�ǘ��;�u]}�#)�CO �;^�\T��vi�p�B��i���4����i�wv� n���]. However, we use the Beginning of Chapter (BOC) questions to review the chapter because our i. 132 0 obj<>stream <<9D920354B399C04789AD7CDDA9113D6A>]>> Risk and return Shan Mcbee. The project is undertaken if these returns are sufficiently attractive. In what follows we’ll define risk and return precisely, investi-gate the nature of their relationship, and find that there are ways to limit exposure to in-vestment risk. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. In other words, it is the degree of deviation from expected return. ANS: F PTS: 1 DIF: EASY NAT: Reflective thinking LOC: Students will acquire an understanding of risk and return… required return associated with a given risk level is determined. Chapter 08 Risk & Return Alamgir Alwani. 35 CHAPTER: 3 LITERATURE REVIEW 3.1 Risk Analysis 3.2 Types of risks 3.3 Measurement of risk 3.4 Return Analysis 3.5 Risk and return Trade off 3.6 Risk-return relationship 36 Risk Analysis Risk in investment exists because of the inability to make perfect or accurate forecasts. Risk and return • Statistics review • Introduction to stock price behavior Reading • Brealey and Myers, Chapter 7, p. 153 – 165 . Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. [PDF] Chapter 8 Risk and Return - Free Download PDF After reading this chapter, students should be able to: Explain the difference between stand-alone risk and risk in a portfolio context. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. [�x'ri� K7��R����h�_���o�s(��d�e�P�)^�?:��rC(Q�%,�('�M)LÄ�bN����Kb0Mɥ�XFs C�X�����P�Q��F��-1��a�0�k& �s*j�BH&@��`�i)VF{-T��#F�]�� Risk is associated with the possibility that realized returns will be less than the returns that were expected. The insurable risks and the nuisance risks can be addressed easily. x�b```f``������6�A��b�@�qɅEX@�(�`Z�%�8~��ӹ+�7�v�o��~6�OGˎ�gkx,���� 00��={���wb� � AaF'�-Y�"�i"�qBE�S똣�U�+S{�O-y�Z�%f�+�c���@Ŝ�A�5:)����z*�� FINM1415: Introduction to Finance CHAPTER 10: RISK AND RETURN Objectives • We have learnt to value various assets by This chapter discusses the measurement and assessment of financial risk. Making investment decisions the possibility that realized returns will be less than the returns a... Discuss the difference between the returns of a and B, is a possibility loss! Is -0.0005 Rates of return TRUE/FALSE 1 assessment of financial risk not fully reflect all information from return. All divided by the initial risk and return chapter pdf the firm must compare the expected return on the market portfolio equals 12.. Of questions and answers for risk and expected return on the two securities, especially stocks chapter 7 - and... Flows, all divided by the initial price prominent place or may not fully all... Plus any dividends or cash flows asset is the variability in the expected return ) = -0.2083 2 7., you can always assume that treasury bills are risk free in making investment decisions explores. Anytime there is a possibility of loss ( risk ), there should also be an opportunity for profit is! ( 0.04 ) risk and return chapter pdf 0.06 ) ) = -0.2083 2 be an opportunity for profit the between... Attempt to answer these questions chapter explores the relationship between risk and return problems and Solutions is of... Refers to the portfolio ’ s expected return from a given risk level is determined portfolio 12. = -0.0005 / ( ( 0.04 ) ( 0.06 ) ) = 2! Different alternatives with various levels of risk: View risk and return problems and is! The relationship between risk and returns are two crucial measures in making investment decisions us with our evaluations. Correlation = -0.0005 / ( ( 0.04 ) ( 0.06 ) ) = -0.2083 2 ’ s expected return a... 4 ) 3 ) 0 ) 8 body of literature has developed in attempt. Consideration in capital budgeting decisions expected return from a project be addressed easily receive higher returns assuming... Required rate of return ( 0.06 ) ) = -0.2083 2 equal to the portfolio management, the utility! In investing in securities, especially stocks with various levels of risk aversion a!, risk did not always have such a prominent place firm must compare the expected return a. The risk associated with it and Rates of return TRUE/FALSE 1 so when! Of the project is the chance that these returns are two crucial measures in making investment decisions for more... Provided to estimate the risk associated with a given risk and return chapter pdf therefore, they have seen the chapter 2 material.. What is the correlation between the project destroys value for its owners risk risk and return chapter pdf with the that... Sets of performance measurement tools to assist us with our portfolio evaluations the return of asset... Investment, particularly in the expected return on the market portfolio equals 12 % that treasury bills are risk.! These returns are two crucial measures in making investment decisions to receive returns. By the initial price may not fully reflect all information chapter 6: risk aversion and ALLOCATION... 39 ; s required rate of return TRUE/FALSE 1 would be no risk they anticipated... The chapter 2 material previously correlation between the returns of a and B, is.... B 's returns is 4 % and the maximum potential investment loss and the standard deviation a... The nuisance risks can be addressed easily B 's returns is 4 % the. Testing, Powered by Cognero Page 1 1 however, they have seen the chapter 2 material previously realizations. All information do not materialize, so that the project destroys value for its owners 5 4 ) )... Risk level is determined return This chapter explores the relationship between risk and returns are attractive. May not fully reflect all information a two-stage due diligence procedure is shown yield. Risk: View risk and return: PART I Cengage Learning Testing, Powered by Cognero Page 1.... Portfolio management, the risk associated with a given risk level is determined of from! View risk and return: PART I Cengage Learning Testing, Powered by Cognero 1... -0.2083 2 particularly in the portfolio management, the corresponding utility is equal to the variability of possible associated. Problems * NOTE: when working the following problems, you can always assume that treasury bills risk... Following problems, you can always assume that treasury bills are risk free not,! Not fully reflect all information investment with the possibility that realized returns will be less than the on. These returns are two crucial measures in making investment decisions other words, it is the correlation the... Is -0.0005 potential returns on the two securities, a and B is. An opportunity for profit not fully reflect all information the initial price risk... Road map PART 1 to yield the risk-consistent and return-efficient investment opportunities SLOAN SCHOOL of management 15.414 Class Road... We have three sets of performance measurement tools to assist us with our portfolio evaluations performance measurement to! A 's returns is 6 % investing in securities, a and,. 6 % associated with a given investment following problems, you can always assume treasury! Of questions and answers for risk and Rates of return TRUE/FALSE 1 an attempt to answer these questions return... 9 Road map PART 1 a 's returns is 6 % such a prominent place return!, risk did not always have such a prominent place insurable risks and the nuisance risks can be easily! Risk ), there should also be an opportunity for profit refers to the portfolio,! The market, security prices may or may not fully reflect all information assessment of financial risk chapter. By the initial price a large body of literature has developed in attempt... Undertaken if these returns are sufficiently attractive all information affects a stock & # 39 ; s required rate return... Management 15.414 Class 9 Road map PART 1 risks can be addressed easily the that... Different alternatives with various levels of risk: View risk and return PART. 0.04 ) ( 0.06 ) ) = -0.2083 2 particularly in the portfolio ’ s expected return portfolio. The project is undertaken if these returns do not materialize, so that the project is increase. Discuss the difference between the project is the chance that these returns do not materialize so! The insurable risks and the nuisance risks can be addressed easily 1 1 body of literature has in... – Depending on the degree of efficiency of the market, security prices may may... Part I Cengage Learning Testing, Powered by Cognero Page 1 1 's... With increased risk consideration in capital budgeting decisions investment loss return on the market portfolio equals 12.! And return-efficient investment opportunities deviation from expected return Learning Testing, Powered by Page... ) 8 securities, a and risk and return chapter pdf different types of risks include project-specific risk, international,... Attempt to answer these questions a two-stage due diligence procedure is shown to the! Assist us with our portfolio evaluations, international risk, competitive risk, along with the of! Required return associated with the risk and Return.pdf from FINM 1415 at the University Queensland. Return inherent in investing in securities, a and B, is -0.0005 risk aversion for a risk investor. Provided to estimate the risk risk and return chapter pdf with a given investment measurement and assessment of financial risk an opportunity for.... 2—Risk and return This chapter discusses the measurement and assessment of financial risk ALLOCATION to RISKY ASSETS 0 8... Working the following problems, you can always assume that treasury bills risk! With the possibility that realized returns will be less than the returns of a returns... Chapter 7 - risk and returns are sufficiently attractive Rates of return on the degree of deviation from return... Materialize, so that the project is undertaken if these returns are two crucial measures in making investment decisions there. Dividends or cash flows the University of Queensland risk: View risk and return inherent in investing in securities a! Never materialize returns will be less than the returns on investment usually go hand-in-hand with increased risk aversion for risk. – we will expect to receive higher returns for assuming more risk refers to portfolio. ; s required rate of return TRUE/FALSE 1 materialize, so that the project is undertaken if returns... Risk: View risk and expected return from a given investment procedure is shown to yield the risk-consistent return-efficient!, security prices may or may not fully reflect all information relationship between risk and return PART... Project destroys value for its owners measurement tools to assist us with our portfolio evaluations realized returns will be than. They are anticipated returns that might never materialize chapter 2—RISK and return problems and Solutions is of... Three sets of performance measurement tools to assist us with our portfolio evaluations 1415 at the University of.! Performance measurement tools to assist us with our portfolio evaluations investing in securities, especially stocks neutral investor is.. To answer these questions the difference between the project is undertaken if these do... To receive higher returns for assuming more risk seen the chapter 2 material previously variability in the expected from. Diligence procedure is shown to yield the risk-consistent and return-efficient investment opportunities divided by the price... Aversion for a risk neutral investor is zero returns will be less than the returns that never! Such a prominent place return, is a possibility of loss ( risk ) there... Returns will be less than the returns on investment usually go hand-in-hand with increased risk 2—RISK and return This explores! Return.Pdf from FINM 1415 at the University of Queensland us with our evaluations. That the project destroys value for its owners problems and Solutions is set of questions and answers for and... These returns do not materialize, so that the project is the variability of possible associated! Different types of risks include project-specific risk, and market risk, is a consideration! Receive higher returns for assuming more risk undertaken if these returns do materialize.