Research Paper (undergraduate) from the year 2007 in the subject
Business economics - Investment and Finance, grade: 1,0, University of
Applied Sciences Berlin, course: Financial Management, language:
English, abstract: In everything you do, or don't do, there is a chance
that something will happen that you didn't count on. Risk is the
potential for unexpected things to happen. Risk aversion is a common
thing among almost all investors. Investors generally dislike
uncertainty or risk and agree that a safe dollar is worth more than a
risky one. Therefore, investors will have to be persuaded to take higher
risk by the offer of higher returns. In this investment context, the
additional compensation for taking on higher risk is a higher rate of
return.Every investment has a risk element: The investor will always not
be certainwhether the investment will be able to generate the required
income. The degree of risk defers from industry to industry but also
from company to company. It is not possible to eliminate the investment
risk altogether but to reduce is. Nevertheless, often there remains a
risky part. According to the degree of risk, the investor demands a
corresponding rate of return that is, of course, higher than the rate of
return of risk-free investments. Taking on a risk should be paid off.
The Capital Asset Pricing Model (CAPM) is an economic model for valuing
stocks, securities, derivatives and/or assets by relating risk and
expected rate of return. CAPM is based on the idea that investors demand
additional expected return if they are asked to accept additional risk.
