Risk and Return Analysis

The aim of the project is to conduct a risk and return analysis on the two companies Fly Safely limited and Always Reliable Limited and consider the overall industry context in relation to the risk profile of the company. The risk and return theory and the relevance of the beta in the context of assignment were discussed. The assignment finally also deals with the financial risks of the company in the form of cost of debt and the influence of the same on the operations of the company.

Running head: FINANCE
Risk and Return Analysis
Name of the Student:
Name of the University:
Author’s Note:

1RISK AND RETURN ANALYSIS
Executive Summary
The aim of the project is to conduct a risk and return analysis on the two companies Fly
Safely limited and Always Reliable Limited and consider the overall industry context in
relation to the risk profile of the company. The risk and return theory and the relevance of the
beta in the context of assignment were discussed. The assignment finally also deals with the
financial risks of the company in the form of cost of debt and the influence of the same on the
operations of the company.

2RISK AND RETURN ANALYSIS
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Risk Profile of the Company..................................................................................................3
Risk and Return Theory.........................................................................................................3
Beta in Risk Analysis.............................................................................................................4
Risk and Return Relationship.................................................................................................4
Company Risk and Cost of Debt............................................................................................5
Conclusion..................................................................................................................................5
Reference....................................................................................................................................6

3RISK AND RETURN ANALYSIS
Introduction
The risk and return analysis of the company or an asset class shows the amount of
return generated by an investor after taking a single unit of risk. The assessment of risk and
return criteria is important as the same will help the investor identify the prospects of the
investment. The risk of the company should be carefully reviewed with the context of
relevant beta of the company which help us get to know about the inherent risk of the
company Brigham, E.F., (Ehrhardt, Nason and Gessaroli 2016). The risk and return theory
for the company was analysed for the company and relevant beta analysis for the company
was done in order to assess the risk of the company. The relationship between the financial
risk and the business risk of the company helped us review the context of inherent risks in the
company (Bonini and Caivano 2018).
Discussion
Risk Profile of the Company
The risk profile of the Fly Safely Limited Company could be better assessed with the
help of the beta value given by the company. The beta value and the standard deviation of the
returns provided by the company were 1.43 times and 4.12% respectively. The beta value and
standard deviation for the Always Reliable Limited Company were around 0.88 times and
1.70% which was much lower than the Safely limited company (Corey 2015).
Risk and Return Theory
The risk and return theory holds good in an efficient market which states that the
return on an asset class is dependent on the risk taken by the investors. The higher the risk
taken by the investor the better the chance and probability of getting the higher return
increases. The risk return factor should be analysed on a per unit basis so that the investments
can be better evaluated (Coskun and Kulali 2016).

4RISK AND RETURN ANALYSIS
Beta in Risk Analysis
Beta shows the sensitivity of the stock or the changes in the value of the stock with
respect to the changes in the market. The beta shows the systematic risk associated with the
company and the influence of the changing market conditions on the company. Beta for the
Fly Safely Limited Company was around 1.43 times and was around 0.88 times for the
Always Reliable Company (Lalvani 2016). The high beta of Fly Safely Company with
respect to Always Reliable Company show that investments in Fly Safely Company is more
risky than Always Reliable Company and the same should be assessed and analysed given the
risk return conditions (Taylor 2017).
Fly Safely Limited Always Reliable Limited
Average Return 5.00% Average Return 8.00%
S.D 4.12% S.D 1.70%
Beta 1.43 Beta 0.88
Risk and Return Relationship
The relationship between the risk and return is based on the concept of higher risks
taken by the investors and the similar return generated by the company. The concept of
higher risk and return relationship shows a probabilistic scenario where the chances of
earning higher returns are possible if the investors take an additional amount of risk. The
elimination of risk is not completely possible from an investment approach but the same can
be mitigated by investing into various class of assets which will provide a diversification
benefit to the investors (Maggi and Uberti 2018).
Company Risk and Cost of Debt
There are primarily two kinds of major risks associated with the company which are
primarily the investment or the business risk and the second is the financial risk of the

5RISK AND RETURN ANALYSIS
company. The business risk of the company shows the risk associated with the operations of
the company and the changing business values of the company. The financial risk of the
company shows the risk associated with the borrowings of the company done. The financial
risk of the company increase with the exposure of the debt or borrowed amount done by the
company as the same increase the interest payment which will directly influence the
profitability of the company and the simultaneous financial condition of the company. The
cost of debt for the Fly Safely Company was around 7.50% which states that the company
has to pay a significant amount of interest on the loan taken by the company in order to
finance the assets of the company (Panda and Moharana 2014).
Conclusion
The analysis of the company includes review of the Fly Safely Limited Company and
Always Reliable Company where the analysis of the Company showed the risk and return
characteristics profile. The relevance of beta in the context of assessment of risk was
reviewed for the company. The assessment of the financial risk of the company is important
as the same should be in line with the business risk of the company. The Cost of debt for the
Company shows the interest expense paid by the company on the debt exposure taken by the
company. The debt exposure helps in the analysis of the company’s financial risk. Companies
should try to maintain the business risk and the financial risk of the company so that the
overall risk condition of the company gets minimized.

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Reference
Bonini, S. and Caivano, G., 2018. Risk/Return Analysis on Credit Exposure: Do Small Banks
Really Apply a Pricing Risk-Based on Their Loans?. In Mathematical and Statistical
Methods for Actuarial Sciences and Finance (pp. 179-184). Springer, Cham.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Corey, G., 2015. Theory and practice of counseling and psychotherapy. Nelson Education.
Coskun, M. and Kulali, G., 2016. Relationship between Accounting Based Risk and Return:
Analysis for Turkish Companies. International Journal of Business and Management, 11(4),
p.240.
Lalvani, A., 2016. An Analysis of International Hedge Fund Risk and Return.
Maggi, M. and Uberti, P., 2018. Google Searches for Portfolio Management: A Risk and
Return Analysis. In Mathematical and Statistical Methods for Actuarial Sciences and
Finance(pp. 461-465). Springer, Cham.
Panda, B. and Moharana, S., 2014. Equity Mid-cap Mutual Funds: Risk and Return
Analysis. Anvesha, 7(3), p.45.
Taylor, K., 2017. ANALYSIS OF LOCALIZED LIMB LOADS FOR INJURY RISK
DURING RETURN TO RUNNING PROTOCOLS FOLLOWING ACL
RECONSTRUCTION.