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COMSATS

INSTITUTE OF INFORMATION TECHNOLOGY

COURSE TITLE:

FINANCIAL MANAGEMENT

TEACHER:

FAIZA SAJJID

ASSIGNMENT NO:

02

TOPIC:

IMPORTANCE OF RISK AND RETURN

SUBMITTED BY:

MUBASHIR TARIQ, JASIM RASHID, WAQAS AHMAD

REGISTRATION NO:

FA10-BBA-043, 048, 035

DATED:

26/9/2012

TOPIC:

IMPORTANCE OF RISK AND RETURN IN FINANCIAL MARKETS

RISK:

In normal terms; Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). The notion implies that a choice having an influence on the outcome exists (or existed). Potential losses themselves may also be called "risks".

In finance, risk is the probability that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. In a view advocated by Damodaran, risk includes not only "downside risk" but also "upside risk" (returns that exceed expectations). Some regard a calculation of the standard deviation of the historical returns or average returns of a specific investment as providing some historical measure of risk; see modern portfolio theory. Financial risk may be market-dependent, determined by numerous market factors, or operational, resulting from fraudulent behavior (e.g. Bernard Madoff). Recent studies suggest that testosterone level plays a major role in risk taking during financial decisions.

In finance, risk has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after-the-fact level of regret. Such methods have been uniquely successful in limiting interest rate risk in financial markets. Financial markets are considered to be a proving ground for general methods of risk assessment. However, these