Corporate Finance: Risk and Return

Running Head: CORPORATE FINANCE
Research Paper
Gabrielle Jobity
Salem International University
Dr. Mitchell Miller,
Corporate Finance
Risk and Return
07/28/2018

1
Table of Contents
a) Explain
the meaning and the fundamentals of risk, return, and risk preferences:.................................2
b) Describe procedures for assessing and measuring the risk of a single asset. .......................2
c) Discuss the measurement of return and standard deviation for a portfolio and the concept of
correlation..................................................................................................................................3
d) Explain the risk and return characteristics of a portfolio in terms of correlation and
diversification and the impact of international assets on a portfolio. .......................................3
e) Review the two types of risk and the derivation and role of beta in measuring the relevant risk
of both a security and a portfolio...............................................................................................4
f) Explain the capital asset pricing model (CAPM), its relationship to the security market line
(SML), and the major forces causing shifts in the SML............................................................5
References:.................................................................................................................................6

2
Explain the meaning and fundamentals of risk, return, and risk preferences.
In the world of investment risk is referred as the chance that an investment actual return
would be different from that anticipated. An individual making an investment anticipates
obtaining certain return from the investment in the future (Baker & Haslem, 2015). Risk
represents the uncertainty that is related with the returns from the investment that introduces risk
into the project.
Return on the other hand refers to the actual income from the project along with the
increase in the worth of capital. There are mainly two constituents of return the basic element or
the periodic cash flow from the investment either as the interest or dividend and modification in
the asset price of the asset which is generally known as the capital gains or loss.
Risk preference is defined as the attitude of people towards risks forming as the key
factor in studying the investor’s behaviour of decision making. According to Mishra, (2015)
assumptions investors are rational and believe that while making investment decisions the
investors tend to have invariant risk preferences.
Describe procedures for assessing and measuring the risk of a single asset.
The numerous process of measuring risk of single asset is given below;
a. Probability distribution: This process of risk measurement provides an insight into the
risk by expecting that the range of probable consequences and allocating the same to
different possibilities.
b. Sensitivity Analysis: This method measures the risk of single asset by employing
numerous ranges of probable yields (İmrohoroğlu & Tüzel, (2014). It judges the
numerous variances in probable outcomes.