Risk and Return: Analysis of the Business Viability

In the business world, risk and return are very important aspect in the analysis of the business viability especially for new business or even for new products of established business ventures and business companies. This is because of the fact that each and every individual who starts a business venture has to critically analyze the risks involved and the profits that can be gotten from engaging in whatever business (Lundblad, 2007). For a business to be successful, proper analysis of the risks and the gains has to be done so as to make sure that the decision of talking up any business venture is well informed. This is the only way that total failure can be alleviated in any business endeavor. This being the case, it is important to understand what risk and returns are and what they mean to a business. This paper explores risk and return by delving into explaining the relationship between them and giving examples of each as well as showing how the full understanding of the concepts of risk and return can help one in future business ventures.

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Risks can be simply defined as the chance that the outcome of an investment will be different from that which was intended and expected (Lundblad, 2007). When investing, it is always possible that the expected outcome may not be realized by the investor. The chance that this can happen is what is referred to as risk. On the other hand, return are the gains or losses that are experienced as a result of an investment. It is important to note that return are like the rewards that any business venture involving investment can bring to the investor. This rewards can come in as losses or as gains to the investor or the business.

Risk and returns are well related in the investment world. This is because of the fact that both of them go hand in hand in situations where any investment happens. The principle of risk return tradeoff has it that the higher the risk in any investment, the more the potential returns (Lundblad, 2007). As such, if the risk involved in any investment being made by any person or business organization is high, then the potential return are equally high. This means that low levels of risk attract low potential return in an investment. For one to be able to reap high returns from any business venture of any kind, he or she must be willing to take the risk of investing the money in a business venture. The willingness to invest is considered as a risk taking step for the perceived outcomes of the investment. Therefore, the higher the potential of risk that such a person engages in the more likely the potential returns will be. For example, considering one person who is willing to invest $50 million dollars in a business venture, the level of risk is high than that who is investing $1 million dollars. This is because of the fact that in case anything goes wrong with the business, the first person risk losing $50 million dollars while the second risk losing only $1 million dollars. This being the case, the potential returns which can either be gains or losses in the business venture are higher for the one investing $50 million dollars.

A good example of a risk is a decision to invest in sports gambling. In a situation where one decides to invest money in opening an online gambling company where players can place their bets on the football matches and win money. The risk involved here is that in the event that each player placing a bet wins the bet, the investor will lose all the money that he or she invested in the gambling company this is a good example of a risk. However, in a business, an investor has to be ready to take up risk that sometimes appear very threatening to the financial wellbeing of an investor. This scenario is an example of a risk because of the fact the main intention of investing is that the players on the website lose their bets an in the process, the investor earns positive returns. However, there is a chance that the returns will differ from what was expected and the investor will lose all his or her money. An example of return can be seen in the event that the business is declared illegal when the country bans sports gambling leading to loss of the money that was invested. In such a case, the return is in terms of loss. In the event that the business thrives and more players lose their bets than they win, the investor gets a lot of profit as returns on the investment made. This is also an example of return in terms of gains.

Stocks and bonds are both credits in which one is the debtor. However, there is less risk in owing bonds than there is in owing stocks. This is because of the fact that holding stocks means that one becomes an owner of the business and therefore shares the ownership in terms of gaining things such as voting rights and sharing in the future profits of the company or corporate that he or she lends the money to (Asness, 2000). As an owner, he therefore becomes a stakeholder and in cases of a risk such as bankruptcy, the bond holder gets settled before the stakeholders. Therefore, this makes stokes to be more risky than bonds. Even though bonds have less returns compared to the stocks due to the fact that even if the corporate does well in future the bond holder does not enjoy the profits, the fact is that the security provides held in terms of bond will provide the interest agreed and the principal amount when the bond matures and incase of risks such as bankruptcy, the bond holder is treated as a creditor who has to be settled by the owner of the corporate entity and as such, at least the principle amounts will be returned to the bond holder (Asness, 2000). The risk is however high in a situation where stakeholders such as the stock holder have to share on the losses of the corporate entity.

Understanding risk and return will be very vital for me in future business ventures in that, it will help me to make informed decisions on which investment opportunities to take. This is because I will be able to effectively analyze and choose the business ventures that are less risky but also making sure that I settle for those with high potential positive returns. Understanding the concept of returns will help me to ensure that I fully evaluate the suitability of each and every business opportunity that I will undertake and this will make me a better investor.

In conclusion, investment presents a lot of risks and returns and it is therefore very prudent for any business person to understand clearly the concepts of risk and return. It is clear for the essay that even though bonds have less potential gains, they are less risky than investing in stocks. As such, it is all about the decision of an individual on whether he is more oriented on reducing the risk or maximizing the potential positive returns from any business investment.

References

Asness, C. S. (2000). Stocks versus bonds: explaining the equity risk premium. Financial Analysts Journal, 56(2), 96-113.

Lundblad, C. (2007). The risk return tradeoff in the long run: 18362003.Journal of Financial Economics, 85(1), 123-150.