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In most financial markets returns and risks are always yielded. When the returns are high the risks are usually high and when the risks are lower, the returns are also lower. A return is usually calculated by deducting the amount that has been invested from the final amount. Returns can be calculated from either exact periods or even by calculating periods that have been combined together. In finance, individuals fix their decisions and thoughts on future expectations and by assessing the probability of whether what occurs is close to what was premeditated. Risks refer to the distribution or variation of returns from the return of such ventures. Risk is usually the likelihood of losses occurring through unanticipated happenings. When it comes to finances, risk is the probability of making losses in investments that have been made (Brigham, 1991).
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Calculation of risks is done by calculating the standard deviation. The relationship between risks and returns is of vital importance to investors. There is a direct relationship between risks and returns. This is because, when an investment takes in more risks than it should expect higher returns. Returns can also be described as anticipated values from a business venture which has a risk linked to it. This can be seen for example, when investing in stock market there is always a fair risk that is usually linked to it (Ricky, 2010).
Risks and Returns in Financial Market
A financial market can be described as a market where people trade. It is also a market where entities can buy and sell goods and services, financial securities and other goods that are of value at prices that demonstrate demand and supply. Financial markets take into consideration risks and returns. In their consideration of risks and returns, financial markets always raise the capital in the market. It also helps in the transfer of risks in the plagiaristic market. It also leads to the transfer of liquidity or money in the market. Risks and Returns in financial markets refer to the fiscal losses or gains that are always witnessed by investments or business ventures when they invest in securities. When an investor or businessperson makes some profits, then that can be seen as returns made. Risks come in when the investor or businessperson starts to foresee negative chances of making losses in terms of money (Brigham, 1991).
When a businessperson makes a choice of devoting a security that has a comparatively low risk then the latent return on that venture is usually fairly small. On the contrary, when one invests in a security that has elevated risk factors then he or she stands a high chance of making more returns. Securities in this case comprise ordinary stocks, commercial bonds and bonds belonging to the government. These securities always offer risks and returns that show some discrepancy. In financial markets, there are factors that determine the rates of risks and returns. The type of securities that one has invested in is the main factor that determines the rates in risks and returns. Investors normally invest in securities that offer one an insight in the profits he or she might gain (Ricky, 2010).
Risks and returns are of vital importance to an investment. They give investors an insight of what to expect. They also share a direct relationship. This is because, the higher the risks, the higher the returns and the lower the risks the lower the returns. Investors have to pay great attention to the type of securities they invest in as they determine the rates of risks and returns. In the financial market, risks and returns are of vital importance too. Risks and returns are used in the financial markets to determine the profits and losses made.