Balancing Risk and Return

Introduction to Balancing Risk and Return

Each decision making includes the future and business decision making is no exception. Though the only single thing specific about the future is that we cannot be ensure what will take place. Things might not turn out like planned and this risk should be carefully referred while making financial decisions.

Like another aspect of life, risk and return tend to be associated. Evidence depicts that returns relate to risk in something such a way displayed in Figure 1.5.

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Figure: relationship between risk and return

This relationship among risk and return has significant implications for setting financial objectives for a business. The owners will need a minimum return to involve them to invest at all, but will need an additional return to compensate for taking risks; the higher the risk, the higher the needed return. Managers might be aware of this and must hit the suitable balance between return and risk while setting objectives and pursuing specific courses of action.

Appetite for risk drives businesses

The last few years, companies from the Western Europe and US joined progressively more through competitors from China, have looked to new markets abroad both to source and sell their products.

Driven through increasing competition at home, companies have been drawn into direct investment in markets which not long ago were referred across the pale. But in the drive to increase returns, they have also been required to admit higher risks. Over time, balance among risk and reward changes. For example, companies flooded into Russia early in the decade. But currently returns have fallen, largely because of booming raw materials prices. Meanwhile the noticeable risk of investing in Russia has grown considerably. As the risk-reward calculation has changed in Russia, companies looked to other countries like Libya and Vietnam in which the rewards might be substantial and the threats, although high may be more manageable.

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