Corporate Investing: Risk and Return and Their Inherent Relationship

The purpose of this paper is to explain corporate investing in terms of risk and return and their inherent relationship. First, there will be an explanation of risk and return and the importance in deciding the right approach to match the appropriate risk tolerance to the expected return for an investment. There will be an explanation of how one can calculate an expected return and its variance. There will be a discussion on diversification to minimize risk while maximizing returns with portfolios and their effects associated with systematic and unsystematic factors. Also, there will some brief details on the security market line and on the capital asset pricing model. Finally, there will be a brief summary in understanding the relationship between risk and return and the importance of diversification to minimize risk while maximizing returns.

Investing, whether corporately or individually, is a means to produce financial growth through stocks and bonds in preparation for the future. Corporately, companies are looking for a means to invest profits to gain higher income and interest to further grow their business (Lee, 2014). Individually, people are typically looking for an investment vehicle to fund college tuition and retirement in hopes to live comfortably in their latter years. Whatever the purpose for investing, there will always be some risk involved with hopes of gaining a return. As an investor there are means to evaluate the possible risks with expected returns mathematically through expected returns, risk premium, and variance calculations. There is also a way to minimize risk and maximize returns for an investor in portfolio diversification. Also, there is a security market line that displays an investments beta ...

... middle of paper ...

...borrow money for the sole purpose of investing because there could be a down turn in the markets. For this reason, they would lose their initial investment which will have to be paid back to the creditor resulting in further loss in opportunity costs for other future needs. When choosing investment options, one should always consider maximizing return while minimizing risk to be a successful investor. One should calculate the expected rate of return keeping in mind both systematic and unsystematic factors that could circumvent their efforts in choosing the right investment to suit their risk-to-return tolerance level. One way to minimize the effects of unsystematic factors is through diversification by spreading funds over various assets within the markets. Diversification is the key to success in the long run to realize the best rate of return to risk ratio.