Table of Contents
What is the risk in corporate finance?
What is the basics of corporate finance, is it protections between the corporations and investors for the trading of financial assets.
Now corporations when they need generating funds, they’re having several options and they are like,
They have to choose between one optimal choice, where the source of where the cost of raising those funds would be the minimum.
Either they could go for banks to borrow or they could issue shares to the public to generate that much amount of funds.
Their requirement for how much fun they want. At what period they want, and the cost involved in generating that fund, all these three things would form a basis of where they should go for it.
If the corporations are like going to public and they are selling their securities they are selling the financial assets to generate funds from there,
Because the public, in a sense would be purchasing those securities and would be paying that amount that is involved in the purchase of that securities.
This is how the trade would take place, and the corporations would be able to get the funds and the public would then expect a return out of it.
What exactly the corporations would then do they would try to, they will try to put those funds in the best possible manner in the business to generate returns out of there to make their investors satisfied with the, with the expected returns from the business.
Let’s have a quick look selling of securities like equity, debt commercial paper is all the ways through which a corporation tries to generate from the investor so in corporations are having many options they could sell the securities,
What is risk and return in finance?
Like equity that commercial paper to generate funds out there. What are the corporation’s perspective and all these things they do to meet the financing requirement and lowest possible cost,
They would always want to have a source to generate funds, where the cost involved is less because the cost involved is less,
They would be satisfied enough to work for it and to gain maximum returns I think it’s underrated funds and best possible investment projects to acquire beneficial business returns from there,
They then try to put all these investments in. They then try to put all these funds in the best possible investment projects for their business.
That returns could be availed and the share of those returns could be passed on to the public who invested in those securities, this business returns need to be greater than the cost of raising funds.
The cost, there is always a cost involved when you are trying to raise the funds; you need to follow some procedure you need to do some documentation and all.
The cost involved in generating the fund should be lesser than the returns which we get after investing that fund in some projects in some businesses and some investment eras where we wanted to concentrate.
And what are the investor’s perspective and all that investors perspective is like analyzing the risk involved, and the return?
That they can make a perfect balanced decision Like if they’re taking a higher risk, obviously they would expect a higher return because they are going.
Generally, the public is risk-averse they don’t like to take the risk, but, in expectation of some higher benefits, they are ready to take that risk their expectation of the return would be higher.
What is a risk in finance?
This is what investor’s perspective they always try to balance the amount of risk they can take and the amount of return, they would expect in a certain period.
Let’s have a look what the corporations, it is just a summary of whatever we return now corporations will try to ensure maximization of shareholders’ and investors’ wealth by making sound investment decisions after analyzing market trends.
What corporations do they send the rates fund; they didn’t raise funds from which they can raise funds from investors,
Corporate finance and these investors would try to make a balanced decision based on risk and watch and return patterns from the purchase of a particular financial asset.
They would try to figure out the trend the pattern which the asset was providing as a return so that they can expect in this amount of in this period what returns,
Can I expect and how much risk is involved. And how does this takes a place for corporations to sell securities to the investors provide funds by buying those securities?
Let’s have a look at the risk and return, are a very simple overview of risk is future uncertainties that may lead to variability in the actual return when compared with the expected return.
Every time, either we talk from the perspective of the corporations who are making an investment or the public who are purchasing some assets as a part of their investment.
There is always some risk involved and why is that risk involved that is because the future is uncertain.
You can’t predict the future but you can, you can’t predict the future so always your risk is there like your money is being put into certain projects is being put into certain businesses that may get into loss if that doesn’t work.
What are the 3 types of risk?
We can form strategies we can make analysis but is there a 100% probability of being successful in any project.
It’s not there so this is where the risk comes into the picture. When you expect certain returns, and that return is deviating from the tax return is deviating from the actual sorry the actual return is deviating from that expected return.
That deviation is a risk. You don’t want many deviations. If you are expecting a 70% return out of your investment and the deviation is about 20% and you’re getting only 50% so that 20% is the risk involved,
And you don’t want that because you want the profit level which you expected. Out of, because you took certain risks are they making you provided fun to the corporations?
The objective of making a sound financial decision is not to eliminate the risk but to measure it and determine whether the risk we are in would be useful when compared with the expected return.
Risk cannot be eliminated. This is rubbish. If someone says that we are eliminating the risk there is 0% risk involved in it.
There is always a risk, there is always uncertainty about what we need to do, we need to measure whether that risk peering is useful enough and the return which we are expecting.
If we are expecting a higher return then we are ready to take the higher risk, but why would we take the higher risk if we are getting a very lower return, you’re not ready to go for that.
What is corporate finance returned is the outcome of investment made in purchasing the securities. Return is anything,
Return is anything that you get out of by putting some cost into something; you put some cost in doing any project in running the business and making any investment proposals.
Risk and return concept
Whatever benefit you get out there and form of profit or the cash flows. Those all benefits together form the return, and it can be done and, and it can turn out to be loss also depending upon the market scenario if the price falls.
And if your business doesn’t go well, or you are going into a bad market a scenario where the depression is going on corporate finance
All these things could also lead to losses, which are also a return for you, but that something you are losing rather than gaining.
Now the expected return is higher with higher risk associated and vice versa as I told if you’re expecting a higher return you are ready to take a higher risk but if you’re not getting a good return why would you go for a higher risk in that.
This time, have a look at this risk and return a correlation is trying to figure out. We have taken like three denominations the fixed deposits the bonds and the shares,
As you all are well aware the shares. You expect a higher return from the shares because of the risk involved in the highest and the shares.
And then comes to the government bonds where the risk is moderate and thus you can expect a moderate return out there.
And then the fixed deposits in the banks where the risk involved is very less and less you can expect a lesser return a fixed rate of return,
Which is, which may not be so much exciting for many people who wanted a good deal of benefit and a shorter period,
Types of risk and return
But here the people who are risk-averse and don’t want to take much risk but wanted continuous growth in their money could go for that.
Risk can return a correlation as the return is going up the risk is also raising and as it comes down the risk. The risk is also decreasing.
Now, corporate finance the ways to calculate risk and return this is not theoretical-we would be figuring out the ways to calculate how we can calculate the risk associated
How can we calculate the return associated, and then we can make a comparison to choose, in which security we want to invest or in which portfolio as a group of securities in which we would like to invest?
We will be looking at the ways of calculating return as periodic return the arithmetic mean return and geometric mean return file to measure the risk we would go for standard deviation and peter