3.

Risk and Return Analysis

In financial management, risk and return are two sides of the same coin; the potential
return on any investment is correlated with the risk the investor is willing to bear. The
general rule is that higher the risk, higher the potential return, and vice versa.
Understanding this relationship is crucial for effective investment management.

Risk in financial terms refers to the uncertainty regarding the financial return on an
investment and the potential for financial loss. It can be categorized into systematic risk,
which affects all investments (like market risk and interest rate risk), and unsystematic
risk, which is specific to a company or industry (like business risk and financial risk).

Return, on the other hand, is the gain or loss on an investment over a specified period. It
is typically expressed as a percentage and can be calculated as the change in the value
of an investment over a period plus any income from the investment, divided by the
initial investment amount.

Risk assessment tools such as standard deviation, beta, and Value at Risk (VaR) are used
to quantify risk. Portfolio diversification is a common strategy used to manage risk, as it
involves spreading investments across various financial instruments, industries, and
other categories to reduce exposure to any single asset or risk.