After analyzing the potential return and associated risk, we have provided our client with many different investment opportunities. Concluding that the client could invest aggressively in one stock with high risk and high return, or take an intermediate approach by investing in different companies and. Finally, she can also diversify her portfolio by investing in bonds as well as stocks. We will discuss the advantages and disadvantages of these options. .
Risk, Return, and Sensitivity to the Market.
Our analysis by investigating an aggressive approach to investing consisted of investing in one stock that has a high rate of return and a corresponding high risk. To determine which company to invest in, we first calculated the average return and risk of each of the selected stocks. The return of a company is the gain on the investment made. After reviewing Appendix A-1, we concluded that Wal-Mart had the highest rate of return. While it appeared that Wal-Mart would be the wisest investment due to its high rate of return, one must account for the tradeoff between return and risk. A high rate of return comes with a high level of risk. Investments with low levels of risk often provide more security on its investments. The type of investment depends on the investor's individual preferences. For the aggressive investor, a stock like Wal-Mart that yields a high rate of return with a high level of risk seems attractive. Conservative investors will tend to make safer investments of their money. They would be more likely to choose a company similar to Pepsi that has a lower rate of return and less risk. The relationship between return and risk is further demonstrated in Appendix A-1.
Commonly, financial analysts compare the stocks that are being investigated to the market as a whole or to another type of investment such as the maturity Treasury bill. We did this by comparing each company to the S&P 500 index, an index that describes the market as a whole.