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Summary BUS FP3062 assessment8 att1.docx Estimating Risk and Return Capella University BUS- FP3062 Investment Returns and Risk Estimation 1. Expected return represents what investorsproject to get after predetermined time to compensate for risksthey take i
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BUS FP3062 assessment8 Estimating Risk and Return Capella University BUS- FP3062 Investment Returns and Risk Estimation 1. Expected return represents what investorsproject to get after predetermined time to compensate for risksthey take in an investment. It projects returns investors expect...
bus fp3062 assessment8 att1docx estimating risk and return capella university bus fp3062 investment returns and risk estimation 1 expected return represents what investorsproject to get afte
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Estimating Risk and Return
Capella University
BUS- FP3062
, 2
Investment Returns and Risk Estimation
1. Expected return represents what investor’sproject to get after predetermined time to
compensate for risksthey take in an investment. It projects returns investors expect from stocks
based on available market data(Eileen Rojas, n.d.).It measures possible losses or profits that
could happen in an investment weighted by their probabilities. The main challenge is investors
must consider strategies for the investment to act in a specified manner. The expected return does
not account for market volatility, informing the risk characteristics to be assumed for the
expected outcomes to achieve. For example, an investment with a high rate of the expected
return may be riskier when the standard deviation is used to reveal the investment's historical
volatility and appraise whether it is in line with the portfolio's goals. It's mainly based on
historical market data and probabilities to project returns, which are not guaranteed.
2. When investors are making investments, they decide the magnitude of their
investments and where to do it. However, the risk profile of an investment versus expected
returns enables investors to diversify investments. Risk-free stock is the portion of the stock with
no market risk. At the same time, the market portfolio has some market risk level (Arnold, Tom
& Terry D. Nixon, 2006). This ratio is determined by the risk levels the investor is willing to
take. Risk-averse investors might only put 20% of their initial investment in the market; hence
the investment has a beta of 0.2, implying the investment is 80% less volatile than the
market.Investors willing to take more significant risks may place 87% of their money in the
market, giving their investment a beta of 0.87, meaning it is 13% less volatile than the market
portfolio hence a high-risk venture. A more significant investment in the market portfolio means
greater market risk assumed by the investors.
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