Discuss the Concept of Investment Return and Risk

Investment decisions are mainly based on two important concepts: return and risk. Every investor expects to earn a good return, but every investment also involves some level of risk.

Investment Return

Investment return is the profit or loss earned from an investment over a specific period. It shows the financial benefit that an investor receives from investing money.

Return may come in the form of income, such as interest or dividends, or capital appreciation, which is the increase in the value of an investment. Return can be measured based on past performance (historical return) or estimated for the future (expected return).

Investment Risk

Investment risk is the possibility that the actual return may be different from the expected return. It also includes the chance of losing part or all of the invested amount.

Risk arises from various factors, such as market fluctuations, business conditions, changes in interest rates, inflation, liquidity problems, credit defaults, and political or regulatory changes.

Relationship Between Return and Risk

Risk and return have a positive relationship. Generally, investments with higher risk offer the potential for higher returns, while lower-risk investments usually provide lower returns.

This is because investors expect additional returns as compensation for taking greater risk.

Therefore, investors should choose investments according to their financial goals, investment horizon, and ability to bear risk.

In summary, investment return represents the reward from an investment, while investment risk represents the uncertainty of achieving that return.

A proper balance between risk and return is essential for making sound investment decisions.

Investment Banking, Module: A, 5th BPE 1(a)