Risk and Return
The required rate of return for an investor is the minimum yearly percentage earned by any investment that will entice a company or an individual to invest in a particular project (Racette, 1972). It is both for the valuation by investors to decide on where to put their money while corporations use it to decide if they can pursue a project or in the expansion of a business.
In an investment, the risk is measured using a number of ways. The first and most primary measure of risk is the standard deviation where it tells an investor how much an investment I likely to fluctuate from the average return (Hagin, 2004). The second measure is the chance of loss which measures how often an investment losses money versus how it makes the money. The magnitude of loss is the other measure of risk that shows the tolerance an investor has for loss when an investment loses a certain amount of money in a year. Drawdown is the fourth risk measure that is usually measured in form of a percentage and shows the loss incurred in an investment from any high point in the value of the investment until the value is recovered by the investment again. The last measure of risk is the beta ratios that measure the risk of an investment as compared to the risk of a comparable market benchmark.
There are two types of investments, that is a risky and a safe investment. A risky investment is any investment that has a higher possibility of taking a turn to the worse (Moore, 2005) while a safe investment is that investment that has high chances of giving higher returns within a short period of time. On the other hand, the risk-return tradeoff is the principle that the return potential increases with an increase in risks.
The concepts of or risk and return rate for an investment are important to business leaders in Saudi Arabia as they help them decide on the times and investments they can undertake so as to achieve the highest profits for their investments. Also, having the knowledge on risky and safe investment will help the business leaders to identify investment and projects to undertake.
Hagin, R. (2004). Investment management: Portfolio diversification, risk, and timing–fact and fiction. Hoboken, N.J: Wiley.
Moore, B. (2005). Risky investment.
Racette, G. A. (1972). Risk and the required rate of return.