Risk and Return Measurement Methods

Added on -2020-07-22

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What is appropriate way to measurehistorical risk and return?
TABLE OF CONTENTSCHPATER 2: LITERATURE REVIEW.........................................................................................12.1 Introduction............................................................................................................................12.2 Appropriate methods to measure risk and return...................................................................12.3 Ways to analyze the risk-return trade-off (RRT) in Exchange-Traded fund.........................22.4 Research gap..........................................................................................................................4REFERENCES................................................................................................................................5
CHPATER 2: LITERATURE REVIEW2.1 Appropriate methods to measure risk and return Jeffrey, Lévesque and Maxwell (2016, pp.189-209) stated in their study risk and return isthe main elements that closely associated with an investment. High value addition in the moneyis one of the main objectives of investors when they decision in relation to investing money inthe securities or portfolio. In this regard, investors undertake several measures with the motive toquantify the risk level and estimate the return associated with the securities. Sherwood andPollard (2017, pp. 1-19) defined several methods in their study that can be undertaken tomeasure the risk level such as standard deviation, magnitude of loss etc. By doing investigationauthor found that standard deviation is one of the most effectual measures that helps in assessingthe risk associated with an investment or portfolio. Moreover, standard deviation clearly reflectsthe extent to which investment will be influenced from the average return. For example: Ifstandard deviation of ABC portfolio is 4% then it shows that in the near future return of the samewill either incline or decline with such limit from average return. In addition to this, by assessingthe magnitude of loss investor can also determine the risk level. For instance: It magnitude ofloss is 30% then it shows that value of fund will be declined with such rate. In this way, throughmaking assessment of standard deviation and loss magnitude investors can measure risk.However, on the critical note, Mascareñas and Yan (2017, pp. 145-151) presented thatbeta is the best measure that provides deeper insight about the volatility of investment orportfolio. By undertaking such measure investors can identify the extent to which investment riskis high or low in against to the market benchmark. Thus, by calculating the beta ratios investorscan assess the level to which specific investment is risky. Moreover, it is assumed that securitieswith higher beta such as more than 1 are considered as risky over others. Liu and Zeng (2017,pp.782-788) said that by calculating value at risk investors can make idea about the same andthereby would become able to measure the likelihood of loss. Thus, by calculating VARinvestors can identify the level of portfolio loss in the best possible way.

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