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Valuation by Rajesh Kumar

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2

Risk and return

Abstract

Risk refers to the chance that some unfavorable outcome will occur contrary to our expectations. Accounting statements and financial ratios measure risk in the context of risk of default and the capacity of the firm to meet its obligations at a certain period of time. The total return on any investment is the sum of the dividend and the capital gain. Historical rates of returns help investors to choose among alternative investment assets. The required return is the sum of real risk-free rate plus expected inflation and risk premium. The excess return required from an investment in a risky asset over that required from a risk-free investment is called risk premium. The variability of returns is known as risk. Risk can ...

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