Principles of Managerial Finance, 15th Edition

8.1 Risk and Return Fundamentals

1. LG1

Most important business decisions entail two key financial considerations: risk and return. Each financial decision presents certain risk and return characteristics, and the combination of these characteristics can increase or decrease a firm’s share price. Analysts use different methods to quantify risk, depending on whether they are looking at a single asset or a portfolio—a collection or group of assets. We will look at both, beginning with the risk of a single asset. First, though, it is important to introduce some fundamental ideas about risk, return, and risk preferences.

What is Risk?

In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn. ...