Risk and Return Relationship

The following links provide information about risk and return and the relationship between the two. In order for us to accept more risk, we must be rewarded accordingly. In business, the same is true. For a business to take on more risk, whether it is a capital project or an investment of their own, they must balance the risk with the perceived reward. These links provide some insight as to how and why this is true.

TRADEJINI. (2016). Understanding the relationship of Risk & Return.

https://www.tradejini.com/blog/jiniversity/understanding-the-relationship-of-riskreturn/

Ontario Securities Commission. (2017). The risk-return relationship.

https://www.thebalancesmb.com/using-financial-statements-as-a-management-tool-1200762

ACCA (2015). The risk And return relationship - Part 1.

https://www.accaglobal.com/us/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/risk-return-relationship-part1.html#Modern Portfolio Theory

Mauldin, J. (2017). Modern portfolio theory 2.0: The best investment strategy today.

https://www.forbes.com/sites/johnmauldin/2017/06/01/modern-portfolio-theory-2-0-the-best-investment-strategy-today/#1b10ca7e1f8f

Thune, K. (2017). Modern portfolio theory: MPT definition and investing strategies.

https://www.thebalance.com/what-is-mpt-2466539

Capital Asset Pricing Model

The following links describe the Capital Asset Pricing Model. While they are dated, they are applicable today, just as they were then. Some of the links provide the formulas related to the model and describe beta and how beta attempts to measure the risk associated with securities.

Fama, E. F. & French, K.R. (2004).The capital asset pricing model: Theory and evidence.

ReadyRatios. (2011-2018.) Capital asset pricing model (CAPM).

Mullins, D.W., Jr. (1982). Does the capital asset pricing model work?

Investor Solutions, Inc. (2018). Understanding beta and market risk.

Discussion Question 1

In the following question you will describe the valuation of securities in the marketplace and the role of risk in the valuation.

How is the return on a security calculated? Is there more than one way to determine this return? How does the marketplace compensate for the risk of a security to determine the selling price of a security? What is the definition of expected return? How does expected return affect risk or the perception of risk?

Following the directions of your facilitator, post your response in the Forum and respond to two of your colleagues.

Discussion Question 2

In the following following question you will describe the valuation of securities in the marketplace and the role of risk in the valuation.

What are the various theories on market/security risk and how it is measured? Describe the Modern Portfolio Theory and the Capital Asset Pricing Model. What is Beta (in relationship to the stock market)? Which theory/model (of the two) do you feel more accurately describes the valuation of equity securities? Why?