Institute to Risk & Return - Introduction to Financial Management, Accountancy Video Lecture | Accountancy and Financial Management - B Com

welcome to introduction to risk and
return brought to you by can Joe calm
understanding the concepts of risk and
return are fundamental to investing
properly and that's the focus of this
video so let's start by understanding
what is risk risk is basically a measure
of uncertainty the more uncertain you
are about an assets true value the
riskier it is risk is measured using a
statistical term called variance which
is used to measure fluctuations of value
so an asset that's fluctuating a lot
that's riskier asset that tends to have
a higher variance it's a high risk
opportunity a low variance investment
opportunity on the other hand will not
fluctuate as much in value it's true
value is more certain and as a result it
is less risky it is safer so let's
illustrate this by taking another trip
to the world of King Julia where Joe is
trying to decide between a couple of
different investment opportunities one
thing he's looking at is US Treasury
bonds now US Treasury bonds are pretty
low risk why are they low risk it's
because they are guaranteed by the US
government and the US government has the
power to print as much money as it wants
so it can pay off the interest in the
principal by just printing more money he
doesn't have to worry about tax revenues
or anything like that
as a result US Treasury bonds are low
risk low variance they do not fluctuate
a lot in value and they're generally a
pretty safe investment Joe is also
considering stocks which are a higher
risk investment now why are stocks
higher risk it's because there are a lot
of factors in play stock prices can be
determined by things like the company's
earnings which are determined by the
management of the company or stuff like
the the CEOs choice of products that
he's going to develop in a given year or
the competitive landscape there are all
kinds of quantitative and qualitative
variables so stocks can either do really
really well or really really badly they
have a high variance and as a result
they are higher
risk investments now you're probably
wondering why would anyone invest in
risky stuff and that's a really good
question I mean people don't like
uncertainty I don't like the idea of
losing a lot of money on some risky
investment but there is a good reason
and that reason is the concept of return
return is basically the expected growth
rate of an investment so when you hear
about an expected growth rate of 8
percent or 10 percent or 12 percent that
is the expected return on your
investment and here is the important
point
risk and return tend to have a trade-off
relationship there is a trade-off
between the two greater return
investments tend to have more risk
so stocks tend to have a greater return
than government bonds and that's
compensation for the additional risks
stocks might have great fluctuations and
value but over the long run
they do tend to produce a higher rate of
return and this makes them attractive to
investors so that is the fundamental
crux of the video the relationship
between risk and return more risk more
return and vice-versa thank you very
much for watching I hope this video has
helped you clarify some of these basic
concepts and if for similar videos I
recommend you check out my website WWE
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