Risk and Return Journal Assignment Example | Topics and Well Written Essays - 500 words

Risk and Return Journal - Assignment Example This journal examines the importance of risk and returns balance (De Bondt and Werner, 1993). Investing in a risk-free portfolio leads to low or no return on investment. For example, an investment in risk-free government bonds yields slight returns on investments. Investors tend to increase their profits by venturing into riskier portfolios. Increasing income is the primary function of doing business, so it is necessary to venture into a substantial amount of risk to achieve this objective. Keeping this in mind it is necessary also to note that taking on a large risk does not necessarily guarantee high returns. There are two aspects of risk, first is the probability of loss on investment. For example, if an investment yields lower returns than expected. Then there is the possibility of earning more than what is. For instance waiting to get 11% return rate but getting a 13% return rate (Bailey, 1994). It is important to maintain a risk and return balance to reduce exposure to losses brought about by risk. When evaluating the risk and return balance, the investment period is arguably the most important factor to be. If the investment period is long, it is advisable to maintain a relatively higher risk tolerance level. If the investment period is short, an investor is advised to maintain a lower risk tolerance level. Another equally important factor is risk capital that is the amount of funds available to trade without affecting daily business operations. Having many risks capital gives one freedom to trade in high-risk investments. On the other hand, having a small amount of risk capital limits one’s freedom to sell in high-risk investments (Bailey, 1994). The amount of investment experience held is another important factor. Relatively new investors are not advised to commit significant sums of capital. However, experienced investors with enough knowledge on risk can invest