LEARNING GOALS

212

RISK

AND RETURN

CHAPTER

Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU

Accounting:You need to understand the relationship between
risk and return because of the effect that riskier projects will
have on the firm’s annual net income and on your efforts to
stabilize net income.

Information systems:You need to understand how to do sensi-
tivity and correlation analyses in order to build decision pack-
ages that help management analyze the risk and return of vari-
ous business opportunities.

Management:You need to understand the relationship
between risk and return, and how to measure that relationship
in order to evaluate data that come from finance personnel and

translate those data into decisions that increase the value of

the firm.

Marketing:You need to understand that although higher-risk

projects may produce higher returns, they may not be the best

choice for the firm if they produce an erratic earnings pattern

and do not optimize the value of the firm.

Operations:You need to understand how investments in plant

assets and purchases of supplies will be measured by the firm

and to recognize that decisions about such investments will be

made by evaluating the effects of both risk and return on the

value of the firm.

Review the two types of risk and the derivation

and role of beta in measuring the relevant risk of

both an individual security and a portfolio.

Explain the capital asset pricing model (CAPM),

its relationship to the security market line (SML),

and shifts in the SML caused by changes in infla-

tionary expectations and risk aversion.

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Understand the meaning and fundamentals of risk, LG5

return, and risk preferences.

Describe procedures for assessing and measur-

ing the risk of a single asset.

Discuss the measurement of return and standard

deviation for a portfolio and the various types

of correlation that can exist between series of

numbers.

Understand the risk and return characteristics of

a portfolio in terms of correlation and diversifica-

tion, and the impact of international assets on a

portfolio.

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