Risk & Return Analysis: Conducting A Risk And Return

Conducting a risk and return analysis requires a clear understanding of what risk and return is and how it relates to the financial sector and investments. There is a strong relationship between risk and return. Risk and return is basically a trade-off for an investor weighing their options based on the risk of an investment and the potential return of said investment. I equate the definition to something pretty simple but obviously there is more too it. Think of a casino slot machine. The higher the bet, the higher the reward. In contrast, the lower the risk the lower the return.

Taking a deeper look into the relationship between risk and return there are some investments that are considered to be more sound than others. For example, a low

More so the risk because my finances can change day to day. Most of my investments are tied up in stocks and bonds, real estate investments, savings accounts, and 401k. In reality, my savings accounts seem to give me less headache because it’s there when I need it, and I have very little risk of it lessening because of a ripple in the volatile finance market. Stocks and bonds are definitely my riskier investments as they fluctuate drastically with the market and there is a never guarantee that my initial investment is still there, let alone profit from my initial investment. 2007-2008 was a time that people saw their stocks and bond investments deplete to nearly nothing when the market crashed and a lot of people lost their life savings in the

Some investments benefit their investors differently. Investors need to consider a lot of different variables: some are specific to the investor and some are specific to the market. A portfolio must be clearly defined with goals in mind and have a sound baseline in which to base all investments off of. Which brings me to my next point. Are bonds part of a financial bubble, inevitably going to burst and affect investments large and small? Yes. bonds are in a bubble are speculating that interest rates will rise a bundle over a very short time period. So if you invest in a 30-Year corporate bond with 6% coupon and duration of 14 years, on paper you will lose 14 percent of your capital each time interest rates rise by 100 basis points (1%). So roughly speaking, in the unlikely event that you buy that corporate bond and wake up tomorrow with the Fed announcing a 350 basis point increase in rates, you’ll be down 50% on your bond. If you had bought a 10 year, 4% corporate bond, you’d only lose about 30% of your investment, on paper (Aloisi,