Semester 1 2018 Corporate Finance BAO2001: Risk and Return Analysis

This report provides an assessment and analysis of risk and return in corporate finance, focusing on the relationship between these two variables. It examines the risk-return trade-off, emphasizing that higher returns typically necessitate accepting higher risks. The analysis includes a detailed technical assessment of fluctuations in a market index, Construction Ltd, and Financial Ltd. The report distinguishes between systematic and unsystematic risk, noting that while market risk affects all securities, company returns are influenced by both types of risk. It concludes that while risk and return are related to changes in market prices, higher risk does not always guarantee higher returns, as demonstrated by the similar returns of Finance Ltd and Construction Ltd despite significant differences in their risk levels.

Corporate Finance

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Assessment and Analysis of Risk and Return.................................................................................3
Conclusion.......................................................................................................................................4
References........................................................................................................................................5

INTRODUCTION
Every financial decision comprises risk and returns variant together. The relationship between
both the variants can be assessed with the risk-return trade-off, i.e. in order to attain higher
return, it is necessary that one must accept the higher risk (Martin, 2017). The present report
deals with assessment of risk and return relating to market index as well as individual companies.
In order to assess the same technical analysis of fluctuation in Market Index, Construction Ltd
and Financial Ltd. has been done in detail manner.
ASSESSMENT AND ANALYSIS OF RISK AND RETURN
Risk can be referred as variability of return in comparison to the expected return. It can be of two
kind systematic risk and unsystematic risk. The prior one belongs to change in return of the stock
in accordance with a change in return of market as a whole and unsystematic risk which is not in
accordance with general market movements. It can be assessed that market risk or systematic
risk is common for all the securities. The return of stock of companies is formed up by
approximately 20 Share Index, the return of market and Beta of stocks. In words of Barber,
Huang and Odean, (2016) return can be referred as income which is being received on
investment which comprises any change in market price of investment in comparison to the
beginning market price of the investment. Ascertainment of return is a tough task as we have to
deal with future and the same is uncertain. It represents the best estimate of investor’s future
return.
In the present case as an assessment of return of the market index, Financial Ltd and
Construction Ltd is being done in order to ascertain the manner in which return of market affects
the other companies. A detailed analysis of return of various periods is being done, and it has
been assessed that all companies do not have the same impact all the time, i.e. they do not move
with market index in an exact manner but usually if the market makes profit, the companies also
earn profit, but the rate of return is never same (Danielsson, James, Valenzuela and Zer, 2016).
The reason behind same is that return of a company is affected by systematic as well as an
unsystematic risk; thus the companies are affected by market index but are not solely dependent
on marketing index. An investor can develop probability distribution in order to shilling return
from statement along with the probability of each return (Baron, Brogaard, Hagströmer and
Kirilenko, 2017). The standard deviation can be asserted as a relevant measure for ascertainment

of extent of risk relating to a security. In case two investments have same expected return but
different standard deviation, than security with lower standard deviation i.e. risk would be
preferred over other security.
Further, the assessment of risk and return of stock revealed the fact that relationship between
risk and return is significantly weak relationship which is against the fundamental applied in
finance i.e. higher return can be attained through acceptance of higher risk. In order to ascertain
market risk, volatility of stock is evaluated and in order to assess the same Beta is ascertained at
various periods. Sornette (2017), asserted that the same is attain through running regression of
past return of security against past market returns. In case beta of particular stock is one that risk
of specified stock is same. The higher the beta, the greater the risk is to be faced by relating
security or market index (Chandra, 2017). Beta of market index, Financial Ltd and Construction
Ltd has been also assessed in present case in order to measure the volatility as well as to compare
the quantum of risk allocated with all the three prices.
CONCLUSION
It can be concluded from above discussion that risk and return are related to each other
regarding the change in market price of securities but it is not necessarily to be their all the time
that the more the risk the higher the return is attained. As in present case the difference between
return of Finance Ltd and Construction Ltd. is almost similar but a significant difference in their
risk variant i.e. beta exists; thus same return is earned by taking different level of risk.

REFERENCES
Books and journals
Barber, B.M., Huang, X. and Odean, T., 2016. Which factors matter to investors? Evidence from
mutual fund flows. The Review of Financial Studies, 29(10), Pp.2600-2642.
Baron, M., Brogaard, J., Hagströmer, B. and Kirilenko, A., 2017. Risk and return in high-
frequency trading.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
Danielsson, J., James, K.R., Valenzuela, M. and Zer, I., 2016. Model risk of risk
models. Journal of Financial Stability, 23, Pp.79-91.
Martin, I., 2017. What is the Expected Return on the Market?. The Quarterly Journal of
Economics, 132(1), Pp.367-433.
Sornette, D., 2017. Why stock markets crash: critical events in complex financial systems.
Princeton University Press.