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Apr 3, 2024

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Journal: Risk and Return in Investing Phillip Oliveira Southern New Hampshire University FIN-320: Principles of Finance Dr. George Mwangi, MPA, CPA, CFA, CMA February 18, 2024

Investment Risk Investing in stocks offers the potential for significant returns over time, but also comes with various risks that investors should be aware of. An example of this comes from Market Risk, “the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.” (Hayes, 2023) Factors such as economic conditions, geopolitical events, interest rate changes, and market sentiment can all influence stock prices. Investment Return News events, such as product launches, mergers and acquisitions, new partnerships, or regulatory approvals, can have a significant impact on stock prices. “Negative news will normally cause people to sell stocks. A bad earnings report, a lapse in corporate governance, big- picture economic and political uncertainty, and unfortunate occurrences all translate to selling pressure and a decrease in the prices of many if not most stocks.” (Beers, 2021) Risk-Return Relationship The relationship between risk and return is a fundamental concept in investing that describes the trade-off investors face between the potential for higher returns and the level of risk they are willing to accept. Generally, higher returns are associated with higher levels of risk, while lower-risk investments tend to offer lower returns. “For example, a portfolio composed of all equities presents both higher risk and higher potential returns. Within an all-equity portfolio, risk and reward can be increased by concentrating investments in specific sectors or by taking on single positions that represent a large percentage of holdings.” (Chen, 2023)

Reflection In making stock-investment decision in my personal life, I would focus mainly on growth investing, which “focuses on selecting companies which are expected to grow at an above- average rate in the long term, even if the share price appears high.” (Charities Aid Foundation, n.d.) It makes sense for me to implement this strategy, as the risk tends to be much lower than say, Value Investing. If I was tasked with investing in a business professionally, I would begin by conducting thorough research on the business, its industry, competitors, and market trends. I would then determine the company’s intrinsic value, the “measure of what an asset is worth –” (Titman, et al., 2021) and then compare it to its current market price to assess whether the stock is undervalued, overvalued, or fairly valued.

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References: Hayes, A. (2023, May 4). Market Risk Definition: How to Deal with Systematic Risk . Investopedia. https://www.investopedia.com/terms/m/marketrisk.asp Beers, B. (2021, September 30). How the News Affects Stock Prices . Investopedia. https://www.investopedia.com/ask/answers/155.asp Chen, J. (2023, March 7). Risk-Return tradeoff: How the investment principle works . Investopedia. https://www.investopedia.com/terms/r/riskreturntradeoff.asp Charities Aid Foundation. (n.d.). Understanding strategies and styles of investing | CAF . https://www.cafonline.org/charities/investments/understanding-strategies-and-styles-of-investing Titman, S., Keown, A. J., & Martin, J. D. (2021). Financial Management: Principles and applications . http://103.227.140.9/handle/123456789/18280?mode=full