Risk and return as it relates to investing in stocks

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Risk and return go together. You must understand this relationship to make informed financial decisions. This applies when you make personal investment decisions or when you’re investing excess cash for a business. In this journal assignment, you will explore the risk-return relationship when investing in stocks in both of these roles.
Directions
Write a journal discussing risk and return as it relates to investing in stocks.
Specifically, you must address the following rubric criteria:
Investment Risk: Explain key risks associated with investing in stocks.
Investment Return: Discuss events that can cause the price of a stock to increase or decrease.
Risk-Return Relationship: Explain the relationship between risk and return and how this relationship affects stock-investment decisions. Use examples to support your claims.
Reflection: Describe how you would make stock-investment decisions in your personal life. Also talk about how your decision-making process might change if you needed to make stock-investment decisions for a business.

Sample Solution

Risk and return are, effectively, two sides of the same coin. In an efficient market, higher risks correlate with stronger potential returns. At the same time, lower returns correlate with safer (lower risk) investments. Together these concepts define how investors choose their assets in the marketplace, and they define how investors set asset prices. When you invest in stock market, it is important to understand the risks and know your limits. Among the major risks you should watch out for include: Market risk: Stock prices can be very volatile and unpredictable subject to different market and economic factors both locally and internationally. Market risk, also known as systematic risk, usually refers to that type of risk associated to a specific market.

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