Week 7 - Discussion Forum

Risk and Return on Investment
Jubaiar Ahmed Bhuiyan (2223611)

University Canada West
FNCE 627: (Section 13) – Personal Financial Planning
Prof. Grace Qian
May 29, 2024
The Relationship Between Risk and Return on Investments
The bond between risk and return will always be relevant, that much is certain, but you agree on
universally applicable concepts that can at least give a general idea as to either get rich quickly
or slowly. This trade-off means that the higher returns an investment has, the greater risks it
carries, and the safer investments tend to lower return on investment. Being aware of this balance
helps investors make investment decisions that are right for them based on their financial goals
and risk tolerance.
Historical Examples: High- Risk vs Conservative Investments
During other points in history investors have sought outsized gains with high-risk investments
such as technology stocks at the height of the late-1990s dot-com bubble. In exchange, investors
who bought Amazon or Microsoft shares before they blew up made out like bandits. But many
others, who invested in less established dot-com companies lost fortunes when the Bubble burst
in 2000 (Shiller 2003).
On the other hand, fixed-return investments like U.S. Treasury bonds provide reassurance and
modest returns. For instance, they are seen as safe havens in times of economic trouble. During
the global financial crisis 2008, there was a flight to quality as investors scrambled to protect
their capital during market distress (Reinhart & Rogoff, 2009). These investments appeal to risk-
averse investors who value capital preservation above large profits.
Personal Experiences and the Risk-Return Equation

Here is a taste of what experience with the risk-return equation can mean for an investment
decision. In early 2008s, My father decided to invest in the Bangladeshi stock market which is
categorized as an emerging market known for their high growth potential. The market of this
segment although seemed not that bad at the beginning but after a short while, global or in some
certain countries economic crisis led to ups and downs with respect to my father's investment. He
ended up losing so much as he randomly invested through an agent and mostly relied on word of
mouth. Whilst stable periods provided high returns, losses were the flipside of this in uncertain
times. This made clear the importance of diversifying and shared the need for robust assets to
offset high-risk investments.
Impact on Portfolio Composition
The way investments are structured can have an impact on your portfolio. One must have an
appreciation for the risks and rewards. For Consideration, younger investors who have yet to take
their money withdrawals choose a higher % of stocks in case the market falls over time since
they can recover from the drops as they have a life span compared to the aged person. On the
hand those closer to retirement may opt for safer assets such as bonds or fixed income securities
to safeguard their wealth and avoid losses when they start withdrawing from their investments.
Risk-based strategy alignment
Diversification, Asset Allocation, and Regular Portfolio Rebalancing: Investment strategies must
be compatible with varying risk tolerances and goals. Diversification is used to spread the risk
across many different asset classes and protect it from a single investment underperformance.
Equities, Bonds, Property, and Commodities. Investors' Investment Horizon may dictate what
types of asset classes would make up a diversified portfolio. Additionally, asset allocation adapts
the portfolio even more to your own personal risk tolerance, with a larger stock allocation being
aggressive and overall lower exposure conservative, favoring bonds & cash equivalents
(Markowitz, 1952).
Rebalancing means bringing your portfolio back to its intended risk level. Certain investments
can expand in tandem with market conditions, making the portfolio riskier. Rebalancing is the art
of selling over-performers and buying underperformers such that they revert back to their
original evergreen state (Sharpe 1994).
Conclusion
Understanding the risk-return trade-off is essential for acting rationally in critical investment
decisions. Historical cases and personal stories illustrate the wide breadth of high-risk versus
low-risk investment profiles, accommodating different investor requirements. It is this
relationship that savvy investors can now grasp with confidence, allowing them to construct a
diversified portfolio sized appropriately for their investment horizon and risk tolerance. Investors
manage through that intersection where those factors combine or work together, which gives
them a chance to optimize possible returns as well as their risk tolerance — usually between
established holdings, spreads of assets within the funds and creating equilibrium while making
market interests.
References
Merton, R. C. (2014). The Retirement Planning Crisis Harvard Business Review.
Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91.
Reinhart, C. M., & Rogoff, K. S. (2009). This Time is Different: Eight Centuries of Financial
Folly Princeton University Press.
Sharpe, W. F. (1994). The Sharpe Ratio. Journal of Portfolio Management, 21(1), 49–58.
Shiller, R. J. (2003). Efficient Markets Theory vs Behavioral Finance. Journal of Economic

Perspectives 17.1 (2003): 83–104.

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Risk and Return on Investment

Jubaiar Ahmed Bhuiyan (2223611)

The Relationship Between Risk and Return on Investments

Historical Examples: High- Risk vs Conservative Investments

Personal Experiences and the Risk-Return Equation

Impact on Portfolio Composition

Risk-based strategy alignment

Merton, R. C. (2014). The Retirement Planning Crisis Harvard Business Review.

Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91.

Shiller, R. J. (2003). Efficient Markets Theory vs Behavioral Finance. Journal of Economic

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