Focus On Risk And Reward Valuations In This Assessmen 392655

Focus on risk and reward valuations. In this assessment, you will explore different measures and sources of risk and how to manage it, portfolio theories, the capital asset pricing model (CAPM), and the efficient market hypothesis (EMH).

This assignment requires an in-depth analysis of risk and reward in financial decision-making, as well as calculations related to stock returns, risk metrics, and valuation models. Students will review scenarios spanning ethical dilemmas in healthcare and business, and apply financial formulas to real-world data. The goal is to demonstrate understanding of financial environments, calculations of risk and reward, and effective communication of complex concepts.

Paper For Above instruction

Risk and reward are fundamental concepts in finance that guide investment decisions and portfolio management. Understanding their measurement, sources, and implications is essential for investors, financial analysts, and managers to optimize returns while minimizing potential losses. This paper examines different measures and sources of risk, assesses how to manage risk effectively, explores portfolio theories, discusses the Capital Asset Pricing Model (CAPM), and explores the Efficient Market Hypothesis (EMH). Additionally, it includes practical financial calculations based on provided scenarios to illustrate theoretical concepts.

Understanding Risk and Reward

Risk in finance refers to the uncertainty surrounding investment returns. Rewards are the gains achieved from investments, often associated with higher risks. The core idea is the risk-return tradeoff, where higher potential returns typically involve higher risk. Quantitative measures such as standard deviation and coefficient of variation help evaluate the extent of risk associated with different investments. Standard deviation measures the dispersion of returns around the mean, providing insight into potential variability, while the coefficient of variation standardizes risk relative to expected return, aiding comparisons across assets with different return levels (Solberg & Goodwin, 2013).

Sources of Financial Risk

Risks in financial markets originate from various sources, including market risk, credit risk, liquidity risk, and operational risk. Market risk, driven by macroeconomic factors and market volatility, is the most prominent and can be measured by beta, which quantifies an asset's sensitivity to market fluctuations (Fama & French, 2004). Credit risk pertains to the possibility of borrower default. Liquidity risk involves the difficulty of selling an asset without significantly affecting its price, while operational risk stems from internal failures or external events affecting operational processes (Jorion, 2007).

Managing Risk in Investment Portfolios

Portfolio management involves diversification, asset allocation, and hedging to mitigate risk. Diversification reduces unsystematic risk by spreading investments across different asset classes. Asset allocation strategies balance risk and reward based on investor risk tolerance, time horizon, and market outlook (Markowitz, 1952). Hedging using derivatives can also protect against adverse price movements. The goal is to construct an efficient frontier—an optimal portfolio offering the highest expected return for a given level of risk (Sharpe, 1964).

Theories of Portfolio and Asset Pricing

Modern Portfolio Theory (MPT) emphasizes balancing risk through diversification to achieve optimal portfolios on the efficient frontier. The Capital Asset Pricing Model (CAPM) links expected return to systematic risk expressed via beta, suggesting that the market compensates investors for time value and risk premium (Sharpe, 1964). According to the EMH, securities prices fully reflect all available information, implying that beating the market consistently is unlikely (Fama, 1970). These theories shape investment strategies and policies.

Practical Financial Calculations

Calculation 1: Stock Return and Percent Return

Assuming an investment in FedEx stock with an initial value of $103.39, a dividend of $0.35, and a final value of $106.69, the dollar return is calculated as follows:

Dollar Return = (Final Price - Initial Price) + Dividend = ($106.69 - $103.39) + $0.35 = $3.65

Percent Return = (Dollar Return / Initial Price) x 100 = ($3.65 / $103.39) x 100 ≈ 3.53%

Calculation 2: Risk Levels of Different Stocks

Standard deviations are provided, and coefficients of variation (CV) are calculated as: CV = Standard Deviation / Expected Return.

  • Rail Haul: CV = 25 / 12 ≈ 2.08
  • Idol Staff: CV = 35 / 15 ≈ 2.33
  • Poker-R-Us: CV = 20 / 9 ≈ 2.22

Ranking from highest to lowest risk based on CV: Idol Staff > Poker-R-Us > Rail Haul

Calculation 3: Portfolio Return

Using the weights and returns:

Portfolio Return = (0.30)(-1.34%) + (0.25)(7.96%) + (0.45)(0.88%) ≈ -0.402% + 1.99% + 0.396% ≈ 1.99%

Calculation 4: Required Return Using CAPM

Hastings' beta = 0.65, Market return = 11%, Risk-free rate = 4%

Required Return = Risk-free rate + Beta × (Market return − Risk-free rate) = 4% + 0.65 × (11% − 4%) = 4% + 0.65 × 7% = 4% + 4.55% ≈ 8.55%

Calculation 5: Beta Coefficient

Given return = 10%, risk-free rate = 3%, market return = 9%, Beta = (Return − Risk-free rate) / (Market return − Risk-free rate) = (10% - 3%) / (9% - 3%) = 7% / 6% ≈ 1.17

Ethical and Practical Considerations

Many scenarios in healthcare and business involve ethical dilemmas where risk assessment intersects with moral principles. For instance, managing conflict of interest in rental arrangements requires balancing financial benefits against ethical standards of transparency and autonomy. Healthcare professionals must navigate confidentiality, autonomy, beneficence, and non-maleficence when making clinical decisions, as in the case of elderly patients or patients with mental capacity concerns (Beauchamp & Childress, 2013).

In situations involving illegal activities, such as prescription forgery, professionals must weigh legal obligations against confidentiality. Reporting to authorities is often mandated when public safety is at risk, but these decisions must be made within legal and ethical frameworks (Bishop & Tyrrell, 2017).

Patient autonomy and informed consent are central when patients refuse care or treatment, emphasizing respecting their rights while ensuring they are adequately informed (Faden et al., 1986). Professional integrity and adherence to legal protocols safeguard trust and uphold standards of practice.

Conclusion

Effective risk and reward analysis is essential in making informed financial and ethical decisions. Quantitative measures enable comparison and assessment of investments' volatility, while theoretical models help in understanding market behavior. Ethical considerations serve as guiding principles in healthcare and business practices, ensuring decisions are aligned with moral standards and legal mandates. Integrating these aspects fosters responsible decision-making that balances financial gain, ethical integrity, and social responsibility.

References

  • Beauchamp, T. L., & Childress, J. F. (2013). Principles of Biomedical Ethics (7th ed.). Oxford University Press.
  • Bishop, M., & Tyrrell, W. (2017). Legal and ethical aspects of health care. In K. L. Smith (Ed.), Healthcare Law and Ethics (pp. 45-67). Routledge.
  • Faden, R. R., Beauchamp, T. L., & King, N. M. (1986). A History and Theory of Informed Consent. Oxford University Press.
  • Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25(2), 383–417.
  • Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
  • Jorion, P. (2007). Financial Risk Manager Handbook (5th ed.). Wiley.
  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
  • Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19(3), 425–442.
  • Solberg, V. S., & Goodwin, T. H. (2013). Financial risk management: Applications in the health care industry. Journal of Hospital Administration, 2(4), 27–36.

Related Assignments