Unit 15 Need help!!

Tamilla

Hi everebody,
Just need in help with Unit 15,can not find what is meant by risk and reward?
Can somebody explain what does mean?
Thanks.

BeccaLouJ9

Risk and Reward are connected, regarding investments. Generally the higher the risk, the higher the return will be. For example buying shares in a company has quite a high risk, as these can go up and down in value, but the return you get can be very high. In regards to this exam I think it has more to do with whether a type of investment is right for the particular company, and weighing up the Risk/Return.

I dont think I answered your question at all actually, sorry!!

B x

Henry

You can look at risk and reward in the context of Ordinary Shareholders and Preference shareholders. These two types of shareholders contribute financing to companies. However, with regards to Preference shareholders, they get a fixed return on their investments and if the business goes into liquidation they would get their shareholding back in preference to ordinary shareholders. Ordinary shareholders however stands a higher risk because when the business goes into liquidation they are the last to be considered when the assets are settled. In this sense they carry a much higher risk than preference shareholders and as such the potential rewards are greater because they are entitled to a greater share of the profits (in the form of dividends) for carrying the most risks.

You could also relate this to other types of investments - example - you could invest in GILTS, bonds or savings accounts etc and whilst the return is guaranteed the reward is small because of the very low risks involved. But when you invests in stocks and shares and other such volatile investments you can get a great reward for undertaking a higher level of risks. All of this can be projected unto a graph to show risk on one exist and return on the other axis and then you can plot someone's attitude to risks and show where they will fall on the graph. For example if someone is not too risk averse they may choose to invest in the market portfolio which is considered the best for diversifying away risks. The market portfolio is like a basket of invest made of say, gilts, savings accounts, trusts and shares. A less risk averse person may however invest all their money in the stock market where the returns (RRI) is significantly higher. A highly risk averse person may take the safest investments such as GILTs or government bonds. Reward is therefore considered to be the premium you earn above the market rate of return.

BeccaLouJ9

Woah.. OK that answer is waaayyy better than mine- I take mine back!

Tamilla

Thanks very much it is good explanation