The Relationship of Risk and Return in Stocks

Risk and Return in Stocks
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Risk and Return in Stocks
Risk and return are some of the factors that need to be considered while deciding to invest in stocks. Risk refers to a deviation from an expected return on investment while return refers to the ratio of the income generated in relation to an investment cost (Tripathi & Panwar, 2020). In many cases, high-risk investments, such as investment in stock, are associated with high returns. This paper analyzes risk and return concerning stock investments.
Investing in stock is associated with high risks. One of the key risks is business risk. In the event of a bankruptcy, stockholders are the last to get returns, if at all (Knoop, 2020). This increases their default risk and investors have to consider the financial health of a company before buying stock. Another key risk is volatility risk. Future returns from stocks are surrounded by uncertainty in terms of the size and timing of the return (Knoop, 2020). Stocks lack a guaranteed dividend or maturity date, which makes them volatile. Stocks are also associated with economic risk. Changes in the economy, such as an economic downturn, affect not only the prices of stocks but also the return on investment.
The prices of stocks are determined by the demand and supply in the marketplace. According to Wall Street (2018), when the demand is higher than the supply, the prices of stock increase and vice versa. Also, economical events such as economic depressions and booms influence the prices of stocks. During economic booms, the prices of stocks are high. Inflation also affects the price of stocks because as consumer prices increase, such changes reduce profits for companies (Calhoun, 2020). Investor sentiments also affect the prices of stocks. When there are more bull investors in the market, the prices of stocks go up and when there are more bear investors, the prices go down (WallStreet, 2018) beca...