Financial Management: Core Concepts, Third Edition

8.1 Returns

The world of finance functions in a two-parameter world of risk and return. Together, these concepts provide the formal environment for selecting investments and evaluating performance. All investors want to maximize return (get the most out of their investment); at the same time, they want to minimize risk (eliminate their potential for loss). This risk-and-return trade-off is the “ability-to-sleep-at-night test” because it is concerned with what level of risk one can bear while remaining comfortable with one’s return on an investment. In general, if your investments keep you up at night worrying about their performance, you are probably bearing too much risk.

Although return and risk are joined at the hip, so to speak, return often ...