Risk and Return Analysis Paper
FIN 402

Risk and Return Analysis Paper Creating the right balance of securities in a diversified portfolio is crucial to maximizing return and minimize risk. This can be done through analysis of current and past activity of each product. Through a risk assessment, return analysis, researching the beta of each security, and reviewing the average risk and return, we can determine the weights of our securities and devise the strongest portfolio to limit risk and maximize return. As a team, we decided to remain with our original five investments; Ford, Microsoft, The Home Depot, Procter & Gamble, and UPS to create a strong diversified portfolio that will meet our expectations.
Risk Assessment and
“For some firms, macroeconomic and industry circumstances might have a greater influence on profits than the firm’s relative performance within its industry” (Bodie, 2007). Analyst will need an array of economic data such as current and expected interest rates, inflation rate, unemployment rates and other macroeconomic variables in order to perform a proper valuation. Risk tolerance is the degree of uncertainty that an investor can handle based upon the negative performance of their portfolio. Investors are willing to take risk because they expect a risk premium. The risk premium is the excess return between the return on risk-free assets such as Treasury bills (T-bills) and a firm’s stock. The risk premium that an investor will demands to hold a risky portfolio versus T-bills is proportional to the level of risk they are comfortable with. By understanding the relationship between risk tolerance and macroeconomics variables, investors are able to make appropriate portfolio decisions that are suitable to their level of risk.
Risk tolerance is based on the risk-return trade off. Inflation has a significant impact on investor’s risk tolerance levels. Inflation is the rise in prices of a certain period. A rise in inflation results in a reduction in the purchasing power of a dollar for a specific period. The same amount of money cannot purchase the same of goods and services it originally could. As interest rate increase to