Trade-off Between Risk & Return in Finance

FINANCE
ACC00716
STUDENT ID:
[Pick the date]

Question 1
a) $3,716,657.93
b) $12,632.20 million
c) 6.01%
d) $6,365.29
e) 4.00%
f) $35
Question 2
a) (i) The computation of the expected return on CSL Ltd (selected company) is shown
below using the requisite inputs from S&P Capital IQ database and the Capital Asset
Pricing Method (CAPM).
(ii) The computation of the expected return on hypothetical company is shown below using
the requisite inputs from S&P Capital IQ database and the Capital Asset Pricing Method
(CAPM).

b) Based on the respective return and risk associated with the individual stocks, the requisite
computations for the portfolio with equal weights have been conducted as follows.
Question 3
Trade-off Between Risk & Return
In relation to making investment decisions, two attributes related to the stock which are of
highest significance are essentially the associated risk and return. While investors want
highest return, it is noteworthy typically it is not possible without the increase in risk. There
is an inherent trade off involved as the investors wanted high returns but with low risks. As a
result the investor needs to aim for that balance where returns per unit risk assumed is the
highest. This is also seem inbuilt in the CAPM approach where investors tend to expect
returns depending on the associated risk (captured by beta). Here the stocks which are
expected to deliver a high returns would have a high risk associated with them. If this is not
done, then it is likely that investors would show a tepid response to such an investment as
there are alternative investments that offer similar returns but with lower assumption of risk
(Damodaran, 2015).
With regards to the overall investing related risk, it is noteworthy that primarily there are two
main components highlighted as follows.
1) Unsystematic Risk – This risk may be attributed to the fluctuation in the stock price
on account of the specific factors related to the stock. These factors would not have
impact on the market as a whole and thereby are known as firm specific factors whose
impact is contained within the company or the industry. However, these factors of
bringing significant variation in the price of the underlying stock leading to risk. This
risk is also known as diversifiable risk as this risk can be controlled through investing
in a well diversified portfolio instead of individual stocks. The firm specific factors
which are the source of unsystematic risk lose importance in case of a diversified