Financial Risk And Reward: Watch The Two Videos Listed Below
Financial Risk And Rewardwatch The Two Videos Listed Below On The Topi
Watch the two videos listed below on the topics of financial risk and reward. Imagine you can interview the presenters and ask one question about financial risks and rewards. What question would you ask? Why do you feel that is an important question? What is Financial Risk?
Required Resources include chapters from Hickman, K. A., Byrd, J. W., & McPherson, M. (2013) "Essentials of Finance," specifically chapters dealing with risk, return, and the cost of capital, as well as multimedia resources from Khan Academy and other educational videos explaining financial risks and investment principles.
Paper For Above instruction
Financial risk and reward are fundamental concepts in finance that influence investment decisions, business strategies, and economic stability. Understanding these concepts helps investors and managers make informed choices to balance potential gains against possible losses. The videos provided on these topics offer valuable insights into how financial risk is assessed and managed, as well as how rewards are generated through various investment strategies.
Financial risk refers to the possibility of losing money on an investment or business venture due to factors beyond immediate control, such as market volatility, economic downturns, interest rate fluctuations, or company's operational failures. According to Preston Psych (2012), financial risk encompasses the uncertainty related to the returns on investments and is intrinsic to financial markets. It is vital for investors to evaluate risk carefully because higher potential rewards are generally associated with higher risks, and misjudging these risks can lead to significant financial losses.
The concept of risk-reward tradeoff is central to investment theory. Investors seeking higher returns must be willing to accept greater risks. Modern portfolio theory, as discussed by Elton & Gruber (1997), emphasizes diversification to optimize the risk-return profile of a portfolio. Furthermore, the Capital Asset Pricing Model (CAPM), explored by Chen (2003), provides a framework to quantify expected returns based on systematic risk (beta), helping investors determine if an investment offers an adequate reward for its risk level.
The videos challenge viewers to consider what types of risks they are willing to accept and how to measure them. For example, investment in stocks is associated with higher volatility and potential gains but also the chance of substantial losses. Conversely, bonds are considered safer but generally offer lower returns. This risk-reward spectrum compels investors to align their risk appetite with their long-term financial goals.
Understanding risk is crucial for corporate decision-making as well. Companies must evaluate the risks associated with expansion, new product launches, or financial leverage. Sykes’ (2006) case studies of small business performance highlight that prudent risk management can distinguish successful enterprises from those that fail due to unforeseen uncertainties. Incorporating risk assessment tools such as sensitivity analysis, scenario planning, and risk-adjusted return metrics supports better decision-making.
The reward aspect of financial markets is equally significant. Rewards come in the form of capital appreciation, dividends, interest income, or other benefits from investing in ventures. The efficient market hypothesis suggests that the prices of securities reflect all available information, implying that consistent above-average returns are difficult to achieve without taking on additional risks. Nonetheless, investors continually seek opportunities with favorable risk-reward profiles, employing strategies like diversification, hedging, and use of derivative instruments.
In conclusion, financial risk and reward are inextricably linked components of finance that influence investment strategies and business decisions. Evaluating risk requires an understanding of market forces, statistical measures, and individual risk tolerance. The ideal investment balances acceptable risk levels with the potential for reward, aligning with the investor’s financial goals and capacity for loss. As illustrated in the videos and scholarly resources, effective risk management can mitigate adverse outcomes while maximizing potential gains, ultimately fostering financial stability and growth.
References
- Chen, M.-H. (2003). Risk and return: CAPM and CCAPM. Quarterly Review of Economics and Finance, 43(2).
- Elton, E. J., & Gruber, M. J. (1997). Modern portfolio theory, 1950 to date. Journal of Banking & Finance, 21(11).
- Habib, A. (2006). Information risk and the cost of capital: Review of the empirical literature. Journal of Accounting Literature, 25.
- Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of finance. Chapter 9 & 10.
- Preston Psych. (2012). What is financial risk? YouTube Video.
- Sykes, A. (Producer & Director). (2006). Evaluating business performance: Small business case studies. Films On Demand.
- Treynor, J. L. (1993). In defense of the CAPM. Financial Analysts Journal, 49(3), 11.
- Additional scholarly works exploring portfolio management and risk measurement include Katz and different authors focusing on quantitative models and market efficiency.